Submitted by Charles Hugh Smith from Of Two Minds
If Being Totally, Disastrously Wrong Were a Virtue, Bernanke and His Fed Mates Should Be Sainted
Ben Bernanke and his Fed mates' secret letterhead: "destroying capitalism from within."
After four years of disastrously wrong policies, let's declare stubborn, hubris-soaked wrongheadedness a virtue and saint Ben Bernanke and his Federal Reserve mates. If we had to distill down the Fed Chairman and the Federal Reserve's policies since the wheels came off the Fed's "shadow banking" system of fraud, collusion, embezzlement and free-floating leverage, we'd have to start with a systems-analysis perspective.
Any system which separates risk from results (gain/loss) is doomed to implode, as the lack of feedback from the real world (also known as consequences) enables the self-reinforcing feedback known as "moral hazard": losses by those who took the risk to reap a gain are made good by those who did not take the risk and who do not stand to gain from the risk they are covering.
In this case, the mortgage origination and packaging "industry" and the investment banks' origination and marketing of fraudulent-from-inception derivatives "industry" took the risks to reap outsized gains from the financialization of mortgages and other debt instruments via leverage, commodifying debt and arcane derivatives, all of which were sold as "low-risk."
Capitalism's primary characteristic is that capital is put at risk for a gain/loss. If risk is off-loaded onto the Fed's bottomless balance sheet and the taxpayer via government-funded bailouts and guarantees, then capital is not actually at risk. Thus what we have isn't capitalism, but cartel crony-capitalism, a phony version of the real thing which guarantees private banking profits and socializes banking losses.
The Fed was recently revealed as having arranged billions in private gain via secretly backstopping the banks with $7.7 trillion. This highlights Bernanke and his buds' second catastrophically wrong policy, that of systemic opacity.
The acme of open markets is transparency. Without transparency, markets are not free or open, they are manipulated-- both to hide those who are benefitting from the destruction of transparency (monopolies, cartels, fiefdoms, kleptocracies, oligarchies, etc.) and to manipulate the market as part of a permanent propaganda campaign to "manage perceptions:" the market's up, everything's dandy.
Bernanke and his faithful banking-sector lackeys have destroyed transparency at every turn, refusing an audit (an audit smacks of--sniff--democracy--how distasteful), masking the $7.7 trillion in backstopping, and hiding the toxicity of the Fed balance sheet, which is loaded with over $1 trillion in distressed mortgage securities that the Fed lovingly took off the bankrupt balance sheets of its craven masters, the banks.
In other words, the Fed has massively rewarded the reckless and rescued the incompetent from the consequences of their actions. If that isn't the perfection of wrongheadedness, what is?
Then there's the disastrously destructive ZIRP--zero interest rate policy. The Fed's idea here is childishly simple, and childishly ignorant: if we lower interest rates to zero, then everyone who is over-leveraged and over-indebted will be able to borrow more, but for less interest, and that will buy the system time to magically heal itself.
The Fed cannot dare grasp that "healing" in capitalism means writing off uncollectable debt and sending insolvent lenders and debtors to bankruptcy court. Capitalism would quickly dispense with their cronies in the banking sector, and so capitalism must be destroyed. That is the Fed's raison-d'etre: destroying capitalism from within. Lenin would be envious.
ZIRP has myriad pernicious consequences. Let's say you have some capital that you want to apply such that it earns a fair return. If interest rates are near-zero, then a fair return has been rendered impossible by Fed policy.
The Fed leaves you only two choices: either put your capital into "risk-on" assets that are inherently risk-laden, or loan the capital out at low rates in an opaque market and hope you'll actually get the principal back.
Imagine being in charge of issuing mortgages which weren't guaranteed by the Federal government agencies of Fannie Mae, Freddie Mac and FHA--that is, imagine you actually lived and worked in a capitalist system, instead of a kleptocratic crony-capital haven.
You might hesitate to loan out large sums of money (jumbo mortgages) in a market where the risk of a decline in the asset (real estate) is obvious but official manipulation means you can only receive a very paltry return on the capital you're putting at risk.
Since the market isn't able to price real estate, risk or credit transparently, then prudent investors would be forced to shun the market: how can you invest wisely when assets, debt and risk can't be priced by the market?
Prudent lenders would withdraw from such a rigged, risky market, which is precisely what has happened. Literally 99% of the mortgage market is now guaranteed by the Federal fiefdoms, all of which are losing tens of billions of dollars and require monumental taxpayer bailouts to keep underwriting the banking sectors' private profits.
Private mortgage lending has simply vanished, and no wonder: if you can't price assets, risk or debt, then only the reckless would enter the market, and even they would only do so if the Fed guaranteed the profits would be theirs to keep but losses could be transferred to the Fed or taxpayers.
The only way to restore trust and clear the market of uncollectable debt is to let the market transparently price, risk and credit--precisely what the Fed's policies are designed to stop. The Fed's knees are chafed from kow-towing to their banker masters, and worshipping the "magic" of their Keynesian Cargo Cult and Lenin ("destroying capitalism from within" should be stenciled on the Fed letterhead).
Separate risk from gain, obliterate transparency and choke the market with zero interest rates, and you've not only destroyed capitalism, you've also destroyed the economy by rewarding the most venal, corrupt, fraudulent and capital-destroying players while stranding the prudent on an island of opacity where the true price of assets, credit and risk cannot be discovered.