Posted 12/08/2008

BERNANKE'S BIG FAILBAIL

Federal Bank Chairman Ben Bernanke has been pouring billions into the economy, lowering interest rates, and bailing out every bank in sight. But nothing is working. The banks aren't lending, and the so-called "credit seizure" is killing a lot of businesses and jobs.

Bernanke is a Doctor of Economics who specialized in studying the Great Depression. But he apparently has little knowledge of the home front in World War II.

Take my Grandma Howard, who lived in a town called Northeast, Pennsylvania. When the government sent everybody a book of food ration stamps, Grandma saw a great opportunity. Even though "hoarding" was hated almost as much as sabotaging, Grandma dived into buying sugar. By the time she had used up her sugar ration stamps, a closet was one-third full of sugar bags. Then she began putting the arm on all the relatives, pleading, "But I need sugar for all the canning I do."

One day, when she was laying on the sugar-begging act for my mother, my six-year-old brother Bob blurted, "Grandma! Grandma! I know where there is lots of sugar for you."

"Really?" my mother asked. "Where is it, Bobby?"

"It's upstairs in a closet. C'mon, I'll show you."

In spite of Grandma Howard's protests, we all followed him upstairs, where he yanked open the closet door to reveal yellow bags of Domino sugar stacked from floor to ceiling.

That was the last time Grandma Howard ever tried to put the arm on Mother for sugar – and the very last time she talked with Bobby.

What Ben Bernanke never anticipated was that the banks are all a bunch of Grandma Howards. He keeps shoveling money at them and they keep hiding it in the electronic version of a closet. So credit dries up and businesses and consumers are harmed – making the recession worse.

Here's how things are supposed to work: Let's suppose a bank must keep 10% of all lending money in reserve. When it gets $10 from the Fed, it keeps $1 and lends out $9 to another bank. That bank, in turn, keeps $0.90 and lends out $8.10. That bank keeps $0.81 and lends out $7.29.

This goes on and on until the original $10 from the Fed expands into $100.

But that isn't happening. When the Fed lends a bank $10, the receiving bank just puts it into an electronic closet and hoards it.

When the Bernanke put $250 billion into the economy, he expected it to mushroom out to a potential $2.5 trillion!

But it didn't. It stayed in the banks' pockets.

The homebuilders claim that the very banks the government bailed out are the biggest hoarders – thus deepening the housing crisis and the recession.

Oh, it's still possible to get money. But if a new business wants to borrow via junk bonds, it is stuck with a Mafia-like juice loan interest rate – 20% or more.

The credit card issuing banks are beginning to act like loan sharks – cutting credit, reducing customer perks, increasing late charges, and raising interest rates to the level of confiscation.

Of course, there's some good news in all this.

If Ben Bernanke had been able to create $2.5 trillion in new money, the dollar would have become wallpaper or utterly worthless.

And we would all have gone broke.

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