Class Warfare

Bernanke was grilled by Congressmen Ron Paul, Luiz Gutierrez, and Barney Frank at the Fed's semi-annual report to Congress. Caroline Baum was discussing this in Congress Draws Bernanke Out on Class Struggle.

Just when you thought increased transparency on the part of the Federal Reserve was contributing to enhanced sophistication on the part of the public, along comes evidence to the contrary.

"I believe economic inequality is a product of monetary policy choices on the part of the Fed," said Congressman Luiz Gutierrez, Democrat of Illinois, at yesterday's monetary policy hearing before the House Financial Services Committee.

Redistributing income has never been part of the Fed's mandate. Nor was it considered the province of monetary policy makers to orchestrate a better balance between society's haves and have-nots.

When it was Gutierrez's turn to question Bernanke -- he had shared his views with the chairman earlier -- he focused on immigration and China, not income inequality. Had the congressman asked, here's what Bernanke could have said:

Through its ability to create reserves out of nowhere, the Fed affects the rate of inflation. Inflation, or a rise in the price level (to Austrian economists it's an increase in the money supply), harms savers more than borrowers because borrowers get to pay back their loans in depreciated dollars.

Even so, inflation ends up hurting the poor more than the rich because it reduces the purchasing power of their modest wages.

So, yes, Congressmen Gutierrez and Frank, the Fed indirectly contributes to income inequality when it allows inflation to increase. It makes everyone poorer absolutely and the poor relatively more so.

Maximum sustainable employment is one of the Fed's dual mandates, but it can't be achieved with more inflation. Artificially manufactured employment is unsustainable and therefore violates the Fed's mandate.

"Maximum sustainable employment is one of the Fed's dual mandates, but it can't be achieved with more inflation. Artificially manufactured employment is unsustainable and therefore violates the Fed's mandate."

Bingo!

On that note, the Mish telepathic question lines are open once again.
The questions are pouring in.

It's time for some Q&A

Q: If artificially manufactured employment violates the Fed's mandate why do they do it?
A: There are lots of reasons and hubris is arguably at the top of the list. The more cynical will suggest that it is all part of a grand scheme to transfer wealth from the poor to the rich. That is in a nutshell what inflation does and Bernanke favors a positive inflation rate at 2%. If it's held low enough the poor and increasingly the middle class don't notice until it's too late. In the meantime, the power of the state grows and grows and grows.

Q: Was not the housing bubble an artificially manufactured employment scheme?
A: Absolutely. To top it off, Greenspan recommenced adjustable rate mortgages right at the bottom in yield.

Q: Why did Greenspan do that?
A: Greenspan slashed rates to 1% and made that recommendation to bail out his banking buddies that were in deep cereal trouble over bad loans to emerging markets, dotcom bubble blowups, and other such nonsense. The effect was that banks were once again bailed out of stupid lending decisions. But Greenspan had to know full well what this would eventually do to consumers or he was a senile idiot. Take your pick. Either way history will not be kind to Greenspan.

Q: Can "Maximum sustainable employment" be engineered by a bunch wizards sitting behind a curtain in OZ?
A: Obviously that is a rhetorical question.

Q: What about Ron Paul questioning Bernanke?
A: Good question. I will address that next. With that reply the telepathic question lines are now closed.

Ron Paul vs. Bernanke



Click here to play Ron Paul vs. Bernanke.

Who Benefits By Inflation?

That was a good exchange but unfortunately it did not address the issue as to why inflation is a tax on the poor. The long answer can be found in Ron Paul's message about Paper Money and Tyranny.

The short answer is that inflation benefits those with first access to money. If ever there was any doubt to that statement, those doubts should now be erased. Take one good look at the housing bubble. Banks and lending institutions benefited by pushing junk upon junk to consumers, to pension funds, to insurance companies and to foreign investors. The fees collected were enormous. Last in line were the suckers buying Florida condos at absurd prices, homes in California, Boston, Las Vegas, Phoenix, etc, etc, at absurd prices as lending standards fell through the floor. The bottom line is that the bottom end of the recipients of the boom made a horrid mistake by participating.

One can debate Ad nauseam whether this was intended or not, but does it matter to the lower (and now middle classes) that are affected by the blatant policy of theft by inflation by the Fed?

Bernanke wants to have a goal of positive 2% inflation. In other words he wants to initiate robbery at the expense of the lower and middle classes by this amount (compounded annually). Given that Bernanke (like Greenspan) ignore asset bubbles in their pricing methodology, the effect is far worse than 2%. Furthermore when things blow up, the Fed is willing to bailout banks but unfortunately consumers late to the party are stuck. This process makes debt slaves out of ever increasing percentages of the population.

The moral implications are obvious. It's time to abolish the Fed and it's time to return to sound money backed by gold and/or silver. Only one candidate stands for that idea. Vote for Ron Paul.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/