Bernanke Foolishly Bashes Gold

Last week Ben Bernanke lectured how the gold standard exacerbated the Great Depression at George Washington University. Statists like Bernanke despise the gold standard since it forces governments to live within their means. There were issues with the gold standard, but it dealt with the price of gold being undervalued. Gold should have been revalued upward around 45-50 dollars/oz according to author James Rickards. The deflationary depression of the 1930’s occurred as a result of the government imposing the price of gold at 35/oz. The market should determine the price, rather than the U.S. government.

Bernanke criticizes the gold exchange standard and even the classical gold standard because he believes that the government has the ability to alleviate recessions and depressions. He follows Milton Friedman’s misguided philosophy that if the Fed monetized more debt during the early 1930s, the economy would have soared back. Policy decisions of the 1920-21 depression illustrates how governments can introduce business friendly measures to improve the economy without resorting to printing money. Unemployment increased to around 14% in 1920 and suddenly decreased to around 3-4% one year later. The Fed raised the fed funds rate to 7%, and Calvin Coolidge drastically cut spending and taxes. Lord Krugman tells us that the U.S. must enact government programs to stimulate the economy, but he’s clearly wrong.

In contrast to the pro-business measures Coolidge enacted in the early 20’s, Herbert Hoover implemented foolish Keynesian policies. His biggest blunder consisted of raising the top tax rate to 63% in the early 1930’s. The economy fell off the cliff following that move, and many bank runs followed. Instead of allowing the market to liquidate bad debt, he attempted to continue the status quo by giving out government handouts. He provided credit to unprofitable companies, gave subsidies to public work programs, and bolstered wages/prices. This proved to be a disaster as the economy suffered a heart attack in 1933.

The main problem in Bernanke’s analysis is that he states that the gold standard created banking panics throughout history. That claim is absurd since these panics occurred due to fractional reserve banking. Banks were able to take short term liquid securities and reinvest these proceeds in long term illiquid assets. When the economy takes a hit like in 2008, margin calls will be exercised and bank deposits will flow out. This will lead to panics since banks will liquidate their assets to raise cash. Bank runs ensue, which results in an economic contraction. Bernanke and his buddies refuse to admit that fractional reserve banking is a ponzi scheme. Instead of bashing gold, they should look at the dire consequences of having an elastic currency.

2 comments to Bernanke Foolishly Bashes Gold

  • Ed_B

    “The main problem in Bernanke’s analysis is that he states that the gold standard created banking panics throughout history.”

    From the reading I have done on this subject, Bernanke’s explanation seems to be a blatant lie. It is more likely that these so-called “panics” were actually induced in the economy by banksters who raised and lowered lending standards such that they alternated between too much and too little credit. This whipsaw motion caused many people to lose their bank-financed property to foreclosure. Once owned by the banks, the panics somehow miraculously disappeared, the economy healed, and these assets were then sold off at large profits. This cycle can be repeated about every 40 or so years, generating HUGE ill-gotten gains for the banks.

    Not satisfied with this looting and pillaging schedule, the banks then went on to become TBTF, which allows them nearly unlimited access to the public treasury via unnecessary “bail outs” that John and Mary Taxpayer then get to pay off. Profits are privatized but losses are socialized. This is a banksters’ wet dream, if ever there was one.

    The solution, of course, is to mandate that banking return to its very conservative roots, not be allowed to engage in leverage that then allows the banks to wager more than they are worth, reinstate the Glass-Steagall Act, and subject the banks to the very same bankruptcy process that other poorly run businesses must face. Once they are forced, kicking, screaming, and leaving finger-nail drag marks every inch of the way, to be responsible for their own actions, we will at last have ownership of their misdeeds placed squarely where it belongs… on those who instigated all this banking malfeasance. Any bank that is TBTF is also TBTE (too big to exist) and should be broken up into smaller banks that can then be allowed to fail if poorly run.

    It should be clear to one and all that Americans do not need any mega-banks and particularly not those that are so poorly run that they cannot survive without massive infusions of “fresh capital” at regular intervals. A well run bank generates all the fresh capital it needs to exist. Only poorly run banks have to beg for capital. All of the banking needs of American citizens can be handled quite well by their local and perhaps on occasion a regional bank. No mega banks are required. Therefore, they should not be funded with tax-payer money. Not ever.

    Unfortunately, the rub here is that these banks do not exist to serve the American public but the American government. The banks buy the US Treasury paper and the government bails them out when needed and protects them from justice. It is an unholy alliance of the first order.

  • ” Any bank that is TBTF is also TBTE (too big to exist) and should be broken up into smaller banks that can then be allowed to fail if poorly run.”

    I’d rather liquidate this bad debt by having interest rates at the market rate and having mark to market accounting. These TBTF should have been bankrupt in the 70s, but the Fed continued to prop up these losers.

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