Wednesday, February 27, 2013


By Chriss Street

 Last week, CalWatchDog, Tea Party blogs and other publications ran my warning that a rise in a combination of inflation and unemployment, known as the Misery Index, could “distort financial markets” and 

result in “significant capital losses” on their huge bond investments of the U.S. Federal Reserve.  Last night, Morgan Stanley heightened those concerns by stating that if the economy contracted and inflation continued to rise, the United States government could suffer a loss of $547 billion on the Fed’s massive portfolio.

In his semi-annual testimony to Congress on monetary policy and the economy, Federal Reserve Chairman Ben Bernanke was forced 

to try to reassure financial market that there was only a very low possibility of an imminent financial crisis.

Bernanke went to great lengths to make the case that the central bank money-printing and bond speculation was prudent stimulus to reinvigorate the American economy.  He specifically pointed out that Fed’s easy-money policies have held down interest rates and helped a revival housing market and car sales.  The Chairman also pointed out a weak job market was more responsible than the Fed for keeping inflation low.

President Obama has been desperate over the last two weeks to try to avoid the 2% federal spending cuts that are part of the financial sequester.  But even after this modest reduction is implemented, the Congressional Budget Office projects over 8 years, his Administration will have engaged in $7.5 trillion in deficit-spending  and the national debt will almost double.  Bernanke tried to help the President’s cause by uttering the usual concerns that suffering by millions of long-term unemployed was good reason to not make cuts until the economy recovered.

Chairman Bernanke was given good marks for his Congressional performance today.  The stock market rebounded and Diane Swonk, chief economist at Mesirow Financial in Chicago, said of Bernanke’s testimony, “Those worried that the Fed may end large-scale asset purchases prematurely should be reassured.”  But as I remember, those nice folks from Chicago were also very positive in November 2008 with the election of Barack Obama in November 2008.  But wasn’t that right before the last financial crisis, where the stock market lost 50% of value and unemployment sky-rocketed?


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