I believe it was the History Channel, but it may have been Discovery. It was one of those restless nights where sleep wasn’t coming easy – a couple years back, as I recall. The subject of the program was an intellectual framework for better understanding the escalation of aerial attacks against civilians during World War II.
Prior to the war, it was generally accepted that there was a moral imperative to protect civilians. Memories of “Great War” atrocities were fresh in leaders’ minds, while major technological advancements in aeronautics and ballistics were recognized as creating unprecedented capacity to inflict devastation upon population centers.
In September of 1939, President Roosevelt issued an “Appeal… on Aerial Bombardment of Civilian Populations” to the governments of France, Germany, Italy, Poland and Britain: “If resort is had to this form [aerial bombardment] of inhuman barbarism during the period of the tragic conflagration with which the world is now confronted, hundreds of thousands of innocent human beings who have no responsibility for, and who are not even remotely participating in, the hostilities which have now broken out, will lose their lives. I am therefore addressing this urgent appeal to every government which may be engaged in hostilities publicly to affirm its determination that its armed forces shall in no event, and under no circumstances, undertake the bombardment from the air of civilian populations or of unfortified cities…”
As the war commenced, efforts were indeed made by most “belligerents” to limit aerial attacks to military targets away from innocent civilians. It wasn’t long, however, before civilian deaths mounted as bombs were unleashed ever closer to population centers. And then not much time elapsed before industrial targets were viewed as fair game, with civilians paying a progressively devastating price. Somehow, an increasingly desperate war mindset saw targeting population centers in much less unacceptable terms. Soon it was perfectly acceptable. War-time justification and rationalization saw conventional bombing of civilian targets regress into direct firebombing and incendiary raids on major cities in Europe and Asia. Less than six years passed between President Roosevelt’s “Appeal” and the dropping of nuclear bombs on Hiroshima and Nagasaki.
I have no interest in debating the politics of World War II. It’s just that I often contemplate the dynamics of this horrific war-time escalation and how it might in a way pertain to what we’ve been witnessing in global monetary management.
History is littered with devastating monetary fiascos. I have shelves stacked with books that recount in lurid detail the havoc wrought from money and Credit-induced boom and bust dynamics. Each episode has its own nuances – i.e. differences in the nature of prevailing Credit instruments, financial institutions, leveraging methods, governmental oversight and responsibility, and varying market, economic and societal ill-effects. Yet in virtually all cases, the post-mortem was similarly unequivocal: the inflation of “money” (various monetary instruments) was understood as a root cause of booms that ended with great economic and social hardship. In most cases, there were aspects of an increasingly unwieldy escalation of money printing/debasement – along with, of course, all the attendant rationalizations, justifications and assurances.
Federal Reserve Credit ended 1990 at $291bn. Monetary stimulus, viewed as necessarily extraordinary at the time of the ‘91/92 recession (deflation risk!), saw Fed Credit post a two-year increase of $51bn (to $342bn). The Fed expanded $35bn during the crisis-year 1998 (to $511bn) and then Y2K worries were behind 1999’s at the time unprecedented $108bn increase. The ‘01/02 recession saw a two-year $120bn surge in Fed Credit, to $747bn. Yet nothing in the history of central banking could compare to the Federal Reserve’s four-month $1.36 TN increase in Credit back in 2008 (to end ’08 at a then incredible $2.247 TN).
As the foremost academic expert on reflationary monetary policy strategies, Dr. Bernanke was uniquely prepared for the 2008 crisis. His “helicopter Ben” references to the government’s electronic printing press caused a bit of a stir when the prolific new governor arrived at the Fed in 2002. The implementation of his radical policies in 2008 was controversial and generated intense debate. The chairman placated his critics with earnest discussion of the details of the Fed’s “exit strategy.”
MarketNews International’s Steven Beckner reported on Dr. Bernanke’s response to questions during the May 6, 2009 appearance before the Congressional Joint Economic Committee: “…Bernanke faced several questions about the potential inflationary implications of the Fed's expansionary monetary policies, which he answered with reassurances. The Fed is spending ‘enormous time’ on crafting an exit strategy from its credit easing programs that have more than doubled the size of the Fed balance sheet, he said. He revealed that the FOMC once again spent the first day of its two-day meeting last week discussing its balance sheet and its ‘exit strategy’ for shrinking the balance sheet and the excess reserves that have been generated as the Fed increased loans and asset purchases over the past year. He said ‘we have a plan in place’ and said the Fed is ‘trying to strengthen and improve it.’ ‘I want to assure the American people that we are very focused -- like a laser beam if I may -- on this issue of the exit and of making sure we have price stability in the medium term… We are working very hard to make sure that, while on the one hand it's very important for us to provide a lot of support for this economy right now because it needs support, but at the same time we understand the necessity of winding this down in an orderly way at the appropriate moment so we will not have an inflation problem on the other side.”
As a student of monetary history, I was comfortable back in 2009 writing that it was all a myth: there would be no exit. The Fed’s inflationary measures would inflate securities markets and reignite Bubble dynamics. And the newfound “global government finance Bubble” would ensure systemic fragility to any meaningful effort by the Fed to dislodge the punchbowl from a Credit system wasted from egregious leveraging and speculation and an economy debilitated by severe structural economic deficiencies (a consequence of preceding Bubbles). And here we are today with not only the Fed’s balance sheet much larger than it was back in 2009, the Bernanke Fed is hankering to embark on yet another round of quantitative easing (electronic money printing).
The Bernanke Fed’s radical policy approach has taken the world by storm. The ECB’s balance sheet (essentially ECB Credit) ended 2003 at $835bn, having expanded only $32bn over the preceding four years. ECB assets today surpass $3.0 TN and counting (perhaps rapidly). The Bank of England has been a leading-edge experimenter in quantitative easing, although with results sufficiently unimpressive to ensure QE proponents clamor for greater munitions. Meanwhile, China and “developing” central bank balance sheets have inflated tremendously, largely because of an unprecedented increase in foreign reserve assets (chiefly the IOU’s from profligate borrowers). Central bank international reserve holdings have increased 50% in the past four years to $10.533 TN. Predictably, China and others now face the serious dilemma of hangovers from previous stimulus programs having created fragilities and, apparently, the desperate need for only more stimuli.
Dr. Bernanke in 2008 justified the unprecedented inflation of Federal Reserve Credit as a necessary and temporary response to extraordinary deflation risks. Especially with global food and energy prices again surging higher, the Fed and global central bankers these days have dropped all pretense that their measures are to combat falling price levels. In a letter to Congressman Darrell Issa that was released today, chairman Bernanke explained that “there is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery.” At the ECB, a radical plan to monetize debt from troubled sovereigns is rationalized as somehow now within its strict (“no bailout” and “no financing of governments”) mandate because of “convertibility risk” and a malfunctioning “monetary transfer mechanism.” As they say, “rules were meant to be broken” and, apparently, well-earned credibility was destined to be forever abandoned.
There is more vocal chatter from dovish Federal Reserve officials as to the benefits of open-ended quantitative easing. Seasoned analysts that should know better even suggest that it is advisable for the Fed to expand its securities holdings (“monetization”/“money printing”) so long as the unemployment rate remains below a targeted level, as if somehow this offers a cure for what ails our economy. At the Draghi ECB, there is a desire for a huge “bazooka” of unlimited bond buying capacity and yield caps to ensure that no one dare be tempted into a bearish bet against European bond prices. And, amazingly, there is hardly a word of protest against the prospect for a major escalation in what is already the most radical monetary policy the world has ever experienced. The prolonged battle has numbed the senses – on both sides.
Chronicling the mortgage finance Bubble over a number of years, I was often sickened by the thought that millions of innocent fellow Americans would see their financial positions devastated come the inevitable bust. History had so proven the moral and ethical imperative of stable money and Credit, and I simply couldn’t comprehend the ineptness of policymakers throughout the Bubble period. And we have worked so diligently to avoid learning lessons from the experience, failing in particular to appreciate how central bank command over interest-rates and market interventions distorts market pricing mechanisms and fuels dangerous speculation and Bubble excesses.
Historical accounts of monetary fiascos often delved into the role of monetary quackery and the contemporary charlatans from those fateful boom periods. I am struck of late by the relative silence of the critics as compared to the vociferous confidence of those claiming that the only problem with monetary inflation is that central banks haven’t been sufficiently committed to it.
Federal Reserve Bank of Chicago President Charles Evans is distinguishing himself as an inflationist extraordinaire. Yet even he is being outdone by some current and former Bank of England (BOE) officials, certainly including outgoing member Adam Posen, who apparently sees no limit to the amount or type of securities a central bank should monetize. “I personally view the teeth-gnashing and garment-rending about what’s fiscal and monetary as too much drama for too little content,” as quoted by the Financial Times. In an article highlighting comments from Dr. Posen and former BOE member Danny Blanchflower, the UK Telegraph went with the headline “‘No clue’ Bank of England urged to drop ‘anguished religious ethics’ over QE.”
But I’ll delve into another comment from Dr. Posen that goes beyond monetary quackery to touch upon a critical issue. Wednesday from Bloomberg (Karin Matussek): “It is in Germany’s commercial and economic interest to restructure the debt of euro-zone countries in trouble, Posen said, according to the transcript of an interview released by the [BBC]… The debt crisis is the result of decisions by the Germans who acted similarly to sub-prime lenders in the US… ‘It was German government decisions and German banks who lent the money to all these countries so they could buy German exports,’ said Posen. Germany has ‘been running a scheme and so just as everywhere around the world you want to restructure the debt, you can’t make it all on the borrower.’ Lenders have to ‘take a hit’ as well, he said."
Curious how those contemptible subprime lenders and Germans all contracted the same lending disease. Does Dr. Posen somehow absolve the role that extraordinarily loose global monetary policy played in incentivizing the so-called “schemes” run by U.S. subprime lenders and the German banks to finance their respective Bubbles? Will Dr. Posen and others accept the reality that inflationary monetary policy is locked into a precarious state of exacerbating global imbalances, where excess liquidity and mispriced finance incentivize the ongoing accumulation of untenable debts by borrowers and uncollectable financial holdings by lenders (not to mention leveraged positions by the inflated speculator community)?
It may today be rational for mortgage lenders to take a hit and renegotiate mortgages with U.S. subprime borrowers, and perhaps for Germany as well to forgive debts from Greece, Portugal, Ireland, Cyprus, Spain, Italy and so on. And, while we’re at it, China, Japan and the developing nations might as well begin to prepare for hits to be taken on U.S. Treasury and agency holdings. And let’s go ahead and have the Japanese public take a hit on their nation’s untenable debt load. Geez, I guess U.S. banks and corporations might as well get working on the write-downs that will be necessary on their inflating holdings of government obligations as well. And there are these tens of trillions of pension benefits…
This gets to the heart of the issue I have with today’s monetary charlatans: They are content to completely ignore history, including the now 20-year sordid experience with contemporary “activist” central banking and resulting monetary inflations. At this point, there is clearly no end point and certainly no “exit strategy.” They are experts supposedly with solutions, of course unwilling to admit that their policies have directly contributed to losses by millions upon millions of innocent victims around the world. They prescribe more potent doses of what we have already repeatedly witnessed ends in calamity. And somehow they have turned the monetary inflation debate upside down, intimating that it would be immoral and unethical to not keep printing.
There might be some casualties and unfortunate collateral damage, but the increasing stakes associated with the war against recession and deflation justifies a dramatic escalation, we are to believe. This is no time to turn soft – to waiver in the face of great adversity. The backdrop beckons for strong leadership and decisive action. The enemy of humanity must be confronted and terminated. Predictably, the answer is for more and more – more only cheaper money and now even the “nuclear option” of unlimited, costless quantitative easing by resolute central banks the world over. “Do whatever it takes!”
