Thursday, June 04, 2009

Bernanke Gets Real

Ben Bernanke, Chairman of the Federal Reserve, exhibited a dose of reality, small though it was, in congressional testimony yesterday.

MarketWatch reports on his testimony, saying, "Bernanke stressed to the budget panel that it was important to begin planning for the restoration of fiscal balance. Financial markets must be convinced that the government is serious about deficit reduction, he said."

MarketWatch also reports on Bernanke's testimony regarding withdrawing the excess money from banks, which will be required to minimize the risk of massive inflation:

"But Bernanke expressed confidence that the central bank would be able to "remove accommodation" at the "appropriate time, and at the appropriate speed to ensure that we don't have inflation risks down the road."

"It is not going to be an easy call. We're going to have to balance the risks on both sides -- not going too soon and stunting the recovery and not going too late and having a bit of inflation, but we will get price stability after we get out of this recession," he said."

As I've been saying for some time, Bernanke is confident the Fed can exercise control over inflation, though he himself says, "It is not going to be an easy call." If they withdraw the funds too early they risk "stunting the recovery" and if they withdraw them too late they risk what he says would be a "bit of inflation." This assumes he actually has the ability to withdraw funds, which is something many doubt, as this would require selling the toxic assets on their books. This will not be an easy task--who would have interest in buying something worth nothing?

In a separate MarketWatch commentary, Bernanke is quoted at more length. He is quoted saying, "Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run."

Bernanke recognizes that our government's deficits are unsustainable and that the Congress must act to reduce the deficits. This means taxes must be raised, or spending curtailed significantly. This of course, is obvious, but something that few, especially in Washington are ready to hear, let alone act upon.

These are dangerous times and we are about to witness our chickens coming home to roost. We've been living unsustainably for decades, and we're about to receive the bill for it. This means either massive inflation, massive tax increases, or both. Either way, we're in big trouble.

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