Janet Yellen To Too-Big-To-Fail Banks: Party On!

The king is dead; long live the king.

As America’s great money printer prepares to hand over the reins to a presumptive successor determined to continue down the same Keynesian path, one has to wonder: How much longer can the Federal Reserve maintain the fiction that it is “managing” the nation’s inflation and unemployment rates?

By failing to honestly measure either, while pumping up one asset bubble after another, it is only a matter of time before the “official” figures from government statistical agencies come totally unglued from the reality experienced by most Americans.

Federal Reserve Chairman Ben Bernanke, renowned scholar of the Great Depression, makes no secret of his mission to ensure the dollar’s value stays on the floor. So what if preventing a supposedly cataclysmic deflation means turning America’s economy into an easy-money crack addict? Trust me, explains the good professor, it could have been worse!

But Bernanke can’t take all the credit. As smart as Ben is, he didn’t transform our monetary system into a Monopoly till on his own, nor will his work be done when his term is up. It may take yet another easy-money Federal Reserve Chairman to secure Uncle Sam’s place in the pantheon of currency debauchers alongside Zimbabwe and the Weimar Republic.

The Fed chairman who first set the course was Alan Greenspan. Having inherited the longest period of economic growth and stable money in American history, he seemed to quickly forget that these two go hand in hand. Rather than let the crashing of the dot-com bubble’s “irrational exuberance” work itself out, Alan reached for the printing press faster than he could burn his autographed copies of Atlas Shrugged. We’ve been on a runaway train ever since and no one can find the brake.

And so the Fed rolled out QE 1, QE 2, QE 3, and on to QE infinity. More importantly, where did all that money go? Much of it went onto the balance sheets of the now officially recognized too-big-to-fail banks, papering over zombie malinvestments that should have been liquidated, but weren’t.

Did any of this money go to finance Main Street businesses that might spur growth? Nope. Instead, it helped reflate the housing bubble, finance Fortune 500 stock buybacks, rebuild the $693 trillion hyper-hypothecated derivatives pyramid, and bid the stock market up to historic highs.

But don’t take my word for it. As Andrew Huszar, who led the Fed’s bond buying program during 2009-2010, admitted in The Wall Street Journal last week, “The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”

In effect, the Fed’s policy telegraphed to the money masters of the universe: “Leverage away! Now that you’re wards of the state, don’t worry about any of that scary taper talk. We’re all in this together!” Fueling the easy-money bonanza is the only way to keep the illusion of returning prosperity going.

And a potent illusion it is. We have nothing to worry about, say the Bureau of Economic Analysis and Bureau of Labor Statistics. Unemployment and inflation are in Phillips-curve equipoise—telling us we need to print even more money to lower the former and raise the latter. Inflation is under control—if you don’t count financial assets and food and energy prices. Why keep basic goods in the Consumer Price Index basket when people can no longer afford them? Let them eat hedonic deflators! Every other central bank in the world is also printing money like mad, so there is no telltale devaluation to give the game away.

And so, Alan and Ben will be followed by a Fed Chairman cut from the same cloth. Long live Janet Yellen, a nominee who couldn’t be more comforting to the crack addicts in charge of both Wall Street and Washington. All that Professor “I don’t see this as an asset bubble” needs to do to satisfy her masters is keep those printing presses cranking. The gnomes feeding the rest of us a steady stream of bogus statistics will be more than happy to flex their rubber yardsticks and report the requested results.