Which one of the following views do you think is the correct one?
1) bernanke printed a lot of money, there was low price inflation, but there would have been huge price deflation if he had not printed. The money printing prevented deflation.
2) bernanke printed a lot of money, and this did cause big price inflation, only not in consumer goods, but in stock prices. (He has fueled a stock bubble)
Option #2 is obviously correct but there are a few caveat.
1)The methods through which inflation (actually the Consumer Price Index) is calculated changed since the '70s period of red hot inflation which occured under Chairman Burns. By first reducing and then eliminating the CPI component made up by the two most important chapters (foodstuff and energy prices) and then cherry picking items and their importance official CPI has been kept in check since Greenspan hit the "Panic Now!" button in 1998.
2)The big merchantilist nations of Asia (led by China and Japan) have acted as sponges for Bernanke's money printing and the US debt-fueled binges. Their vast trade surpluses are mostly dollar denominated and by using these dollars to buy US treasuries and other forms of debt China and Japan have effectively acted as sinkholes for both monetary inflation and debt (the situation really heated up in 2005). Also by effectively pegging their currencies to the US dollar (an extra tax splapped on their own citizens) these merchantilist countries have supplied cheap goods to the US, effectively helping Bernanke to keep CPI figures under control even further.
3)When a bubble bust, there's no deflationary demon as Keynesians and other money cranks believe. Assets drop in price because they were overpriced in the first place and unnecessarily high stocks were built in anticipation of even further price increases. Mr Market (as David Stockman calls the process) just does his job of purging these malinvestments by allowing prices to drop to a level investors may be willing to liquidate them and by exposing crooked and fraudulent practices for what they are.
4)One thing Bernanke understands very well is you can "supercharge" a country GDP through inflation by both putting bank credit in overdrive and inflating asset prices. Nixon cynically used this method to create a boom in 1972 to get relected. The Chinese have been practicing the same scheme for almost two decades now. The big advantage is you can use these doctored macroeconomic data to silence opponents and bamboozle the public into compliance.
5)We are now navigating in uncharted waters. I have been stressing this point for at least five years. There are no precedents for the present situation: Mr Market tried to put some order in 2008 only to be told to get lost. It's very likely he'll either come back later to kick down the door and get his vengence or disappear for good for ever.
I agree with all your points, but in point (3) it seems to me you are overlooking the possibiity that, in the absence of bernanke's money printing, many banks would have gone bankrupt. causing big deflation due to the multiplier. Unless you explain why this would not have happened, I don't see how you can say that (1) in my original post is "obviously" wrong.
The problem is this. Banks are not so "special" as to deserve a peculiar treatment. If they have authorized too many bad loans, piled too many junk bonds or just plain illiquid, they should pay their due, even if this means they should go belly up.
The 2008 crisis was highly compartimentalized. It was confined to the big Wall Street firms, especially AIG and investment banks like Lehman Brothers. "Main Street America" banks and insurance companies were financially sound: there was never a risk (as touted by a panic-stricken Paulson) of "ATM's going dark". Ironically it was Wall Street's monstrous appetite for junk financial products which made these firms so sound: all subprime mortgages, all bad loans were sold to such firms as Lehman Brothers, then repackaged and sold to similar speculation-geared firms. In fact firms such as Lehman aggressively raked in all the "junk" they could find, the more, the better.
Main Street America banks' holding were almost entirely made up of sound loans to good payers, not subprime mortgages or similar dubious financial products. How Paulson panicked (Stockman said he behaved "like his hair was on fire") after such luminaries of crony capitalism such as Jeff Immelt (the GE CEO) threw a hissy fit because they were about to lose their monster bonuses and dividens is one of the most shameful stories of the last century. Just to give an example Don Regan, Reagan's Secretary of Treasury, resisted the bailout of Continental Illinois Bank in 1984 until he was overruled by the Gipper himself, despite being a Merrill Lynch man.
What would have happened if instead of Paulson there would have been, say, George Humphrey (Ike's Treasury man)? The big subprime sinkholes on Wall Street would have gone bust one after another (taking Deutsche Bank and the myth of German financial integrity down with them), those behind them would have been bankrupted and possibly persecuted. AIG would have been broken up, Immelt would have been left at the mercy of GE shareholders (GE would have been able to absorb the hit no problem apart from the drop in dividends) and GMC would probably have gone bust, probably taking the UAW down with it. Yes, there would have been a brief and probably not too painful recession for Main Street America, surely not the monster Stagflation unleashed by Nixon and which Ford failed to stop when he had the chance and we would have learned valuable lessons. Main Street banks would have continued in the role of lenders, insurance companies would have continued behaving like insurance companies and not as engines of financial recklessness as AIG. Throw in a spike in interest rates (take your pick between small increments and the Volcker Diet) needed to reel in ral inflation and correct commodity prices) and today we would all be better off.
Did Bernanke prevent deflation? Oh my yes.
... just as the State
has no money of its own, so it has no power of its own - Albert Jay Nock
The way these options are worded is strange, so as to make them exclude each other. The first option is not completely wrong, only partly wrong. There was, and is, large price inflation. But that doesn't mean there would not have been deflation in place of his actions.
How about option 3?
3)Bernanke printed a lot of money, causing a significant rise in consumer goods prices and in the stock market. This wave of inflation counter-acted what would have been a large wave of deflation.
The Anarch is to the Anarchist what the Monarch is to the Monarchist.
A lot of the money has been stuck in excess bank reserves and not lend out. The Federal Resreve is currently paying .25% interest on excess reserves and the banks are keeping this parked at the Fed. Also corporations are hoarding cash
"Companies hoarding more cash than ever before" Las Angeles Times March, 20 2013
In his book "The Mystery of Banking" Rothbard explains that an inflation goes through three phases. In the first phase prices rise less than the rise of the money supply because people have confidence and will hoard the new money creation (we are in phase 1). 2nd phase people lose confidence and prices will increase faster than it can be printed. In the last phase the central bank attempts to print more money to keep up with prices increases and this is hyperinflation. The central bank cannot print money to keep up with increases in prices so paradoxically the inflation creates a shortage of money. At no point does price increases match exactly with the increase in the money supply
Edit: The reason hyperinflation or even the more modest phase II of inflation creates a money shortage is that even if you have wheelbarrows full of it prices are so high you can't buy much of it. Rothbard says the best way to ease this money shortage is to stop printing money then prices will fall to the point where there is sufficient money to carry on comerce
There's a parallel between the modern excess reserves boom and the Great Depression which would not have been lost to Rothbard.
Between 1933 and 1939 excess reserves held by the Fed rose from 2.7 billion to 11.7 billion.
Excess reserves usually build up because there's either of a somnolent economy (hence a lower demand for loans) or the banks are sitting scared and refuse to lend money.
In the '30s it was the former: not only demand for loans had drastically dropped but the system was in the middle of a massive debt liquidation. 1% interest rate was better than doing nothing with all that cash to spare.
Right now it's because, thanks to the Fed's panicked state, cash is superabundant. Bernanke thought the problem laid in monetary stringency and opened the spigots. There's so much liquidity around these days banks can lend money and still have plenty to spare. Of course loans do not go to the "small guy" as Bernanke wrote in his sales brochures. The small guy is either paying off his existant debts, refusing to take new loans or, due to the collapse in the subprime market, cannot open a new line of credit, at least not at the same extremely favorable conditions as in 2005. Outside of the fantasy world of crony capitalism, Mr Market is still allowed to do his job.
Of course Rothbard's cure was correct, as proved by the Volcker Diet in the '80s. Problem is a spike in interest rates after a prolonged period of cheap credit always means a recession with its adjoining corollary of big name bankruptcies. The Bank of Japan (BoJ) attempted to keep inflation in check in 1989 by raising interest rates. The bubble popped so loudly BoJ officials, in a veritable Paulson moment, panicked and dropped interest rates to near zero "in perpetuity". This in turn fueled another massive bubble (Asian Tigers) which popped almost as loudly as the Japanese one and led to a two decades long depression in Japan (the only consolation for the Japanese being periods of consumer prices deflation). Personally I doubt today any central bank official, let alone politician, would have Volcker's nerve to carry on in face of a well needed correction.
Rising prices are not the problem nor are falling prices the problem of all of this money printing. The real issue is that this new money has made huge distortions in the structure of production. Look at all of the businesses being kept alive through Fed money creation: 1. The entire investment banking business, 2. The largest players in the commercial banking business, 3. At least two of the Big 3 automakers, 4. The entire collegiate education system, 5. Medicare part D and most of the other parts, etc. This amounts to nothing but a giant diversion of scarce resources away from satisfying the desires of consumers to satisfying the desires of politicians.
And unfortunately as we have seen in Japan, as long as the central planning of the financial system continues the economics of the West will be stagnant.