Global Economic Crisis

On September 15, 2008 the supposedly safe, perpetually prosperous world of post-industrial capitalism blew itself up when Lehman Brothers filed for Chapter 11 bankruptcy. The iconic Wall Street investment bank was forced into this act of extremis when the collapse of the subprime mortgage market in the United States turned the securitized mortgage backed debt obligations engineered by the wizards on Wall Street into toxic assets, in the process extinguishing most of the storied investment banks in the United States, including Bear Stearns and Merrill Lynch. In those previous cases, Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke cobbled together a pseudo rescue, whereby these two firms were absorbed by JP Morgan Chase and Bank of America respectively, with massive financial aid and guarantees against bad debt generously provided courtesy of the American taxpayer. However, when Lehman Brothers stood on the precipice, the economic policymakers in Washington were confronted by the issue of moral hazard, and the growing public distaste with the concept of “too big too fail,” the justification previously issued by Paulson and Bernanke to prop up failing Wall Street firms.

The U.S. Treasury and Federal Reserve made a decision to allow Lehman Brothers to fold, assuming its demise would not pose a systemic risk to the global financial system.  Shortly afterwards, AIG was also on the verge of bankruptcy, due solely to the exposure of its Credit Default Swap operation spearheaded from its London office. Treasury Secretary Paulson stated that AIG was so large a factor in the global financial system, its business liquidation could not be allowed to occur, regardless of the subsidies required to keep it afloat. Through the middle of 2009, the U.S. government would inject in excess of $180 billion dollars into AIG.

The calculation made by Bernanke and Paulson that Lehman Brothers was expendable, especially in light of the measures taken to save AIG, Merrill Lynch and Bear Stearns, not to mention Fannie Mae and Freddie Mac, was destined to be proved fatally flawed, and in rapid order. As with so much else about the Fed and Treasury Department in terms of assessing the systemic impact of the collapse of the subprime mortgage market and its related financial derivatives, they badly underestimated the destructive forces that had been unleashed upon the global financial system by the collapse of Lehman Brothers. When Lehman Brothers imploded, its debris virtually froze the entire global interbank lending mechanism, and brought the flow of credit to a virtual standstill.

An immediate consequence of the disintegration of Lehman Brothers was the accelerating rise in the LIBOR and Ted Spreads, reflecting frozen global credit markets saturated with counterparty risk aversion. Money market funds were being depleted at a dangerously rapid pace, and economic indicators across the globe were heading south at a pace that soon became a free fall. The possibility of another Great Depression was openly being talked about, as it became abundantly clear that Lehman Brothers and its derivatives were far more embedded with the global financial system than the supposedly smart men of finance and economics who ran the Treasury and Federal Reserve had led themselves and the public to believe.

The rest was history. Paulson and Bernanke, in a state of panic, compelled a terrorized Congress to borrow $700 billion and hand it over to Treasury, supposedly to buy up toxic assets polluting the balance sheets of the nation’s banks, under the auspices of a program that came to be known as TARP. Once Paulson got his money, he changed direction, choosing to inject the TARP funds directly into the banks, as opposed to buying toxic assets. The Fed engaged in an unprecedented degree of monetary measures, becoming the lender to Wall Street and corporate America of last resort.

The collapse of Lehman Brothers undoubtedly was a major factor in the November 2008 presidential election, which witnessed the historic triumph of Barack Obama. The new president maintained many of the policies put in place by Paulson after the collapse of Lehman Brothers, reappointed Ben Bernanke as Federal Reserve Chairman, and brought in a $787 billion economic stimulus package, also based on borrowed money, to help reverse the worst recession the United States has endured since the Great Depression.

One year after Lehman Brothers disintegrated, the entire world is in the grips of the most severe synchronized global recession since World War II. We are told, however, that things could have been much worse, if the “brilliant” policymakers who had initially misjudged the extent of the economic and financial crisis had not taken such radical steps, all of which have involved an unprecedented level of public debt, and the bailouts generously awarded to the most reckless Wall Street firms. Also, one year afterwards, the extravagant executive bonuses are still being sprinkled on the Wall Street crowd, at levels that rival pre-meltdown levels.

Unquestionably, the demise of Lehman Brothers was a seminal point in global financial and economic history. I do not believe, however, we have witnessed the full consequences of its collapse. I fear that the worst is yet to come.

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Under the tutelage of Chairman Ben Bernanke, the Federal Reserve system has achieved the heights of power, while simultaneously the economy it  presides over has descended to the depths of  despair. This Zen paradox sums of the inexplicable success of Ben Bernanke. Having ignored or mistakenly assessed all the warning signs that the American housing bubble had burst and was set to take down the Wall Street investment banks, the panicky and massive policy measures undertaken by Bernanke in the wake of the collapse of Lehman Brothers last year have made him the improbable hero of the global financial and economic crisis. With Bernanke set to be reappointed as Fed Chairman by President Barack Obama, it seems both he and the Federal Reserve have successfully consolidated their monetary and economic omnipotence.

Yet, some cracks in the foundations of the Fed’s  previously unassailable power have begun to emerge. Manhattan Chief U.S. District Judge Loretta Preska has issued a ruling in the case of Bloomberg LP v. Board of Governors of the Federal Reserve System that marks the first challenge to the virtual dictatorship on monetary policy that Bernanke has been able to impose on Congress and the media. The lawsuit had been filed by the Bloomberg news organization after the Federal Reserve refused to disclose the recipients of $2 trillion in emergency loans it provided to troubled banks. The rationalization used by the Federal Reserve for its refusal to follow the legal requirements of the Freedom of Information Act truly defines the meaning of arrogance. If the American taxpayers, who are ultimately on the line for the loans, were to know the identity of the banks receiving financial aid from the Federal Reserve, they would act irresponsibly and perpetuate a run on those very institutions, claim Bernanke‘s minions. In other words, Nixonian logic applied to the massive indebtedness of the American taxpayer, who is not entitled to know for whom the balance sheet of the Federal Reserve is being overloaded with toxic assets.

In its lawsuit, Bloomberg stated that disclosing the beneficiaries of the Federal Reserve‘s largesse is “central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”  However, Bernanke and company are not interested in illuminating the public in their understanding of the government’s role in the crisis, especially that of the Federal Reserve. Full disclosure might very well contradict the image being crafted by the Fed’s aggressive public relations program to portray Ben Bernanke as the saviour of the American economy and global financial system.

The Fed may still appeal Judge Preska’s ruling. However, if the ruling prevails and becomes precedent, it will mark a rare but important defeat for the Federal Reserve’s cone of silence and lack of transparency.

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Alan Grayson is a Democratic Congressman  representing Florida’s 8th congressional district. He was elected in 2008, having beaten the 4-term Republican incumbent. Despite his freshman status, Grayson is already developing a reputation as a fierce advocate for taxpayer interests in the wake of massive bailouts of the financial sector that have been orchestrated by the Treasury Department and Federal Reserve. Serving on the Financial Services Committee and subcommittee that deals with capital markets, the congressman, having been a successful entrepreneur, clearly knows how to read a balance sheet and ask relevant questions. Thus, the stage was set when the Florida congressman had the opportunity to question Fed Chairman Ben Bernanke when the latter appeared before Congress to present an update on the economic crisis gripping America and much of the world.

Congressman  Grayson demanded details from Bernanke on a half trillion dollars in  liquidity swaps to foreign central banks undertaken by the Federal Reserve, apparently under the radar and in the dead of night. Demonstrating that he and his staff had done their fact-checking, Grayson noted that in 2007 these swaps with overseas central banks were a mere $24 billion, but had swelled to a staggering $553 billion in 2008 with the onset of the Global Economic Crisis.
The exchange between Grayson and Bernanke appears almost Kafkaesque in its reality-defying character, conveyed in the following, as a clearly uncomfortable Fed Chairman provides a tortured explanation regarding this half  trillion dollar transaction:

Bernanke: “Those are swaps that were done with foreign central banks…”
Grayson: “So who got the money?”
Bernanke: “Financial institutions in Europe and other countries…”
Grayson: “Which ones?”
Bernanke: “I don’t know.”
Grayson: “Half a trillion dollars and you don’t know who got the money?”
Bernanke: “Um, um, the loans go to the central banks and they then put them out to their institutions…”
Half a trillion dollars is a number so grandiose, it defies comprehension unless it is reduced to its ultimate simplicity. These credit swaps that exchanged American dollars for various foreign currencies were done without any consultation with elected officials, and amount to more than $1,800 for every man, woman and child residing in the United States. Under section 14 of the Federal Reserve Act, according to Chairman Bernanke, the Fed’s Open Market Committee (FOMC) can engage in swapping U.S. dollars with foreign central banks without any limitations, at any time, without any requirement for congressional scrutiny. In other words,  “Congressman Grayson, why are you wasting my valuable time with these irrelevant questions,” Bernanke seemed to be implying through his frosty demeanour. Never mind that the Federal Reserve Act was originally passed in 1913, nearly a century ago.

“Is it safe to say that nobody in 1913 contemplated that a small little group of people would decide to hand out half a trillion dollars to foreigners,” Grayson pointed out. He raised as an example New Zealand, which received $9 billion from the Federal Reserve, an amount equal to $3,000 for every one of that nation’s citizens.

The congressman from Florida’s 8th district is to be commended for his focussed inquiries directed at the Fed Chairman, and steadfastness in the face of Bernanke’s evasiveness. More importantly, Grayson raises anew serious questions regarding the unlimited power placed in the hands of the Federal Reserve. The defenders of the Fed’s current position of fiscal omnipotence maintain that its independence from political influence must be preserved. However, the historical record, especially in the last 20 years, clearly shows that the Federal Reserve is influenced politically, either through the executive branch and the power of the President to reappoint the Fed Chairman, or through the large financial institutions on Wall Street, which have a level of access to Fed decision-making not available to any other category of citizens. More importantly, since the onset of the current financial and economic crisis, the Federal Reserve and its chairman have proven to be highly fallible, having made many errors in judgment, not the least being their original overly-optimistic pronouncements when the first tremors from the subprime meltdown arose.

Congressman Grayson’s penetrating inquiry serves as a reminder that the ultimate systemic risk to America’s financial system and economic superstructure stems from allowing a small, fallible clique to make speedy decisions involving incalculable sums of public money without any consultation with or checks and balances from the nation’s elected representatives. This is not only fiscal tyranny by any other name; it is a recipe for unintended and disastrous consequences.

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Hank Paulson is deeply empathetic about the American people’s plight; absorbing  intergenerational levels of debt to cover the costs of unbridled greed and recklessness on the part of Wall Street. Thus, while being raked over the coals at a congressional hearing for his role in the near destruction of the global financial system last fall, and the $700 billion TARP Wall Street bailout package he was able to pull through a terrified Congress as the price of avoiding financial Armageddon, the former Treasury Secretary had this to say about the plight of the American people: “The tragedy is they didn’t create the problem. But they would be the ones that would pay the greatest penalty if there was a collapse.”

Paulson’s statement, while superficially sympathetic to the injustice of the collective innocent paying for the sins of the few, is in substance the manifestation of a disdain for the broad masses that borders on contempt. In effect, he is reiterating a posture that has been consistently maintained by the “masters of the universe” since the onset of the global financial and economic crisis; privatize the profits (especially after radical deregulation) but socialize all losses.

Since last fall, trillions of dollars have been added to the U.S. national debt through TARP, fiscal stimulus packages made necessary by the financial collapse, and other forms of direct and indirect government and Federal Reserve aid to the financial sector. All in the name, we are told, of the American people who, it is claimed, would be subjected to even greater debt and future taxation if Wall Street is not bailed out. The old concept of “moral hazard,” still in force when Paulson allowed Lehman Brothers, a competitor  of his former stomping ground Goldman Sachs to die, was swiftly ejected when AIG faced bankruptcy.

Now Goldman Sachs is declaring a record quarterly profit, and arrogantly boasting of the billions of dollars of bonus payments that will be dished out to its employees. What the firm that Paulson used to lead as Chairman won’t divulge is how much of its profit was due to $13 billion it received in payment from the U.S. taxpayer, using AIG as a pass-through for the payment. Neither will this Wall Street entity make public the impact of tens of billions of dollars in low-interest, taxpayer subsidized loans it now has access to, once Hank Paulson and Fed Chairman Ben Bernanke changed the rules, and allowed investment banks such as Goldman Sachs to magically transform themselves into bank holding companies.

If Hank Paulson symbolizes the incestuous relationship between Wall Street and government, his attitude reflects how insignificant the general public has become in the minds of those calling the shots and making the critical policy decisions in the wake of the worst economic crisis to afflict the American people since the Great Depression. But when those who caused the disaster are spared the ravages of the unwashed masses who are now being corralled into ever-growing unemployment lines, and instead are basking in the illumination of near record bonus payments, their callousness can at least be understood.

The question that Hank Paulson and his ilk may ultimately be compelled to answer is why should the American people be eternally grateful for their “noblesse oblige” when it becomes crystal clear to them that they have been dispossessed of much of their future as  the price for  bailing out Wall Street and its  architects of our current economic and financial doom.

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Larry Summers, Timothy Geithner and Ben Bernanke may be fated to go down in history as the three horsemen of the global financial and economic apocalypse. Though Fed Chairman Bernanke was inherited by the Obama administration, Geithner, Summers et al were the chosen economic team of the Obama administration. In effect, their selection was the single most important decision made by President Barack Obama  in response to the Global Economic Crisis. Regrettably, thus far their performance has been found wanting. Most disconcertingly, many of their public statements are Bush 43 redux, a smorgasbord of overly-optimistic platitudes utterly dichotomized from economic realities. Perhaps the one phrase that is most likely to haunt the Obama administration is one uttered originally by Ben Bernanke in the spring; those perennial “green shoots” that the Fed Chairman could see sprouting amid the recessionary quicksand engulfing the global economy.

Like a barbershop quartet, other senior Obama economic policymakers and advisors sang the happy melodies of these enigmatic green shoots. This happy talk was not without its effect; in large measure the bear market rally on Wall Street, what others have referred to as a “dead cat bounce,” was a by-product of investor optimism fuelled by the green shoots serenade flowing from the banks of the Potomac.

As Yogi Berra would say, “it’s déjà vu all over again.” George W. Bush’s economic team was also full of joyful verbiage, until the floor literally collapsed from under them with the disintegration of Lehman Brothers. In the case of the Obama economic crisis management team, however, this theory of hope triumphing over reality has been executed with even more creative dexterity. With all credible mathematical indicators revealing that most of the largest U.S. banks are functionally insolvent, the Treasury Department concocted a totally cosmetic set of so-called “stress tests” to “prove” that these insolvent banks were, actually, “solvent.” In addition, by forcing changes in the FASB rules through political intervention, some of these banks were even able to show a profit in their Q1 results.

The June unemployment numbers, however, are throwing a cold dose of reality in the direction of the pontificators of ephemeral green shoots. With the publicly released U3 Labor Department jobless report showing the level of U.S. unemployment having risen to 9.5%, and the less publicized but far more accurate U6 report showing actual unemployment and underemployment now at a staggering 16.5%, it is quite clear that the American economy, along with most of the planet, is still undergoing a painful contraction. The fact that one in six Americans is either unemployed or trapped in low-paying part-time employment due to the lack of full-time positions, is a far more significant economic indicator than short-term gyrations on Wall Street or periodic upward anomalies confronting an otherwise downward economic trend.

Amid all the green shoots fantasizing, it must be recalled that the United States economy depends on the spending of the U.S. consumer for more than 70% of its aggregate demand. The real significance of rising unemployment, exchanging full-time jobs for part-time employment and the fear factor inhibiting spending by those who think they may lose their jobs, is a radical contraction in consumer spending. It is this reality more than any other that is weighing heavily on the nation’s economic superstructure. Not only is joblessness rising. After years of American consumers spending more than they earned, they have now shifted radically towards a high level of savings. Transitioning from a negative savings rate, the U.S. wage earner now banks nearly 7% of his/her declining take- home pay, despite virtually zero interest being offered to savers due to the Federal Reserve’s zero interest monetary policy.

The American consumer is scared, and is not being seduced by talk of green shoots emanating from Washington. With consumer spending undergoing significant contraction not only in the United States but in virtually all major economies throughout the globe, increasing pressure will bear on securitized investments based on loan portfolios directly or indirectly linked to consumer spending. Retail and shopping mall mortgages will witness higher levels of defaults, in conjunction with the already virulent afflictions  hammering sub prime and prime residential mortgages, commercial office space mortgages, consumer loans and credit card debt.

The Obama administration apparently believed that the original $700 billion TARP Wall Street bailout passed by Congress in the last weeks of the Bush administration, and President Obama’s $800 billion stimulus spending bill, would suffice to stabilize the economy and put the brakes on the free fall in employment numbers. However, jobs are still being shredded each month by the hundreds of thousands, while banks still suffer from balance sheets saturated with toxic assets. The FDIC has already closed more U.S. banks this year than in all of 2008.

As I indicated in a recent piece, there is already serious discussion occurring in the corridors of power in Washington on the necessity of a second stimulus spending package. This is an acknowledgement that the Obama economic crisis team, thus far, has been an abject failure. However, with so much money already having been borrowed by the U.S. government on a variety of schemes supposedly aimed at saving the economy, further large doses of public debt bring along very dangerous negative implications of their own.

In a recent column in the Financial Times of London, Mohamed A. El-Erian, chief executive and co-chief investment officer of PIMCO, the world’s largest bond trading firm, offered the following observation:
“The bottom line is a simple yet powerful one. The global crisis is morphing again. Having already contaminated (in a sequential and cumulative manner) housing, finance and the consumer, it is now threatening the potency and credibility of the economic policy making apparatus. As far as I can see, there are no first best policy responses that are readily available and easy to implement. Instead, the economy will continue to struggle, navigating both the adverse implications of last year’s financial crisis and the unintended consequences of the experimental policy responses. Given the inevitable socio-political dimensions, this story will play out well beyond the realm of the economy, policymaking and markets.”

Mohamed El-Erian is not offering green shoots, but he does speak the truth. Unfortunately, the truth is so bitter, it is unlikely that President Obama’s principal economic advisors will face up to the harsh and even brutal realities of the Global Economic Crisis until it is far too late for any policy response to be effective.

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The current monetary and fiscal policies being enacted by the key economic decision-makers in the United States are laying the groundwork for a far more dangerous inflationary environment than anything encountered by Paul Volcker. The explosive growth in the money supply and government debt is simply unsustainable without severe inflation. It must be kept in mind that the Federal government is not the only public authority engaged in massive deficit spending. Throughout America, state, county and municipal governments are faced with imploding tax revenues and lack the ability or political flexibility to cut services to a level commensurate with revenue flows. Both the Fed and the public sector are engaging in a reckless gamble; borrow like crazy in the hope that this overdose of economic stimulation will restore growth to the economy and normal tax revenues, leading to a decreased and sustainable level of public sector indebtedness.

If one believes that the policymakers running the Federal Reserve, Treasury and Federal government, the same architects of the Global Economic Crisis, are smart enough to now get everything right, perhaps we may escape the worst consequences of their turbo-charged fiscal and monetary policies. However, there are growing indications that global investors and the broader market are beginning to reach a far more sobering assessment.

In an interview with Bloomberg News, Bill Gross, co-chief investment officer of PIMCO (Pacific Investment Management Company) suggested that the coveted AAA credit rating U.S. government debt now benefits from will eventually be downgraded. “The markets are beginning to anticipate the possibility of a downgrade,” Gross said.

China, the major purchaser of Treasuries and holder of $1 trillion of U.S. government debt, is already on record as expressing concern for the integrity of its American investments, and has begun actively exploring alternatives to the U.S. dollar as the primary global reserve currency. These moves by China are not based on fears of expropriation of its U.S. assets, but focuses on the specter of hyperinflation destroying much of the value of assets denominated in U.S. dollars. No doubt China’s economic experts are well aware of the growing number of economists who are convinced that the U.S. will be unable to service its rapidly expanding debt burden without significant inflation. Inflation in monetary terms means the erosion of the intrinsic value of the American dollar.

What is most frightening about the policy moves being enacted by the Fed and Treasury is that their actions may not be a reckless gamble after all. They may have come to the conclusion that only hyperinflation will enable the United Sates to avoid national insolvency. In effect, they may be pursuing the exact opposite course undertaken by Paul Volcker in the early 1980’s. If that is their prescription for the dire economic crisis confronting the U.S., then one must conclude that Ben Bernanke, Timothy Geithner and Larry Summers have learned nothing from history Once the spigot of hyperinflation is tuned on, it becomes a cascading torrent that is almost impossible to switch off, and which in its wake inflicts inconceivable levels of economic, political and social devastation. Before it is too late, President Obama should put the brakes on his economic team’s dangerous gamble with the haunting specter of hyperinflation. If he fails to act in time, a hellish prospect may be his economic and political legacy.

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Likely to be contained? No economic forecast has ever been so catastrophically flawed as Ben Bernanke’s utterance before the Joint Economic Committee. And that was by no means the only wrong prediction uttered by Ben Bernanke, as the subprime crisis morphed into a full-blown financial meltdown, leading to the Global Economic Crisis. The track record established by Ben Bernanke in predicting the consequences of an unfolding economic crisis of unprecedented global ferocity has been downright calamitous. Yet this same deficient analyzer of economic phenomena remains as chairman of the Fed, with unchallenged powers to set monetary policy.

As the subprime crisis became something much worse, Bernanke adopted a slightly different tack in his public posture. Rather than rosy forecasts, he boasted about the lavish toolkit that the Fed possessed. “We have many tools in our toolkit,” boasted Bernanke on more than occasion, cheerfully promising to use all the tools he felt were necessary.

The vocabulary that the Fed Chairman has succumbed to I find absolutely fascinating. Massive monetary decisions that are risky in the extreme, and will likely have intergenerational consequences, become mere “tools.” The consequential becomes the ubiquitous.

Bernanke and the Federal Reserve have been in panic mode, as the financial system became unglued. Massive quantitative easing has flooded fiat liquidity into America’s battered economy, buying a short-term respite at best, and at the cost of hyperinflation down the road. Most troubling, and often in total secrecy, the Fed has been bailing out Wall Street, above and beyond the TARP program being managed by the Treasury Department. Since last September and the bankruptcy of Lehman Brothers, the Fed’s balance sheet has doubled to more than $2 trillion. Most troubling is the quality of that balance sheet, which has historically been composed primarily of Treasuries. Now, however, at least 75% of the Federal Reserve’s balance is in the form of questionable assets, such as mortgage backed securities. In effect, Ben Bernanke has transformed the Federal Reserve’s balance sheet into the nation’s largest toxic dump. It may be only a matter of time before the Fed approaches Congress-and U.S. taxpayers- for a bailout of its own.

While Bernanke may still inspire confidence from President Obama, he frankly scares the hell out of me. Isn’t it time we took away the toolkit from this disaster-prone Fed Chairman, before it is too late?

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In contrast with Fed Chairman Ben Bernanke, the Bank of England governor is watching the accumulating public debt with deep concern, instead of advocating massive quantitative easing, as it is being executed in the U.S. by the Federal Reserve. Mervyn King is clearly worried about the long-term implications of the growing national debt driven by fiscal imbalances, recognizing the future and destabilizing dangers of hyperinflation and national insolvency. Carefully worded and diplomatic as his message was, King’s warning is a clear message to the British political establishment: the current budgetary trajectory is unsustainable.

How bad is the U.K.’s fiscal posture? The true answer is obscured by the accounting rules being applied by the British government, which has assumed the costs and risks of bailing out the U.K.’s largely insolvent banking sector. By some calculations, the loans and guarantees have created a potential public liability of approximately $700 billion that is not reflected in official public debt figures, which stand at about one trillion dollars, or 47% of the nation’s GDP.

In comparison, there are no warnings about massive U.S. budgetary deficits that are being planned by politicians for the next decade, far beyond the three-year time limit King recommended to the MPs on the Treasury Committee. Yet, the United States has an even more daunting debt problem than the United Kingdom. At present, the national debt of the United States exceeds $11 trillion, equivalent to 78% of GDP, a much higher figure than during the New Deal period of the Great Depression of the 1930s. With U.S. GDP projected to shrink in the current fiscal year while deficits add at least $2 trillion to the national debt (my estimate), the ratio of public debt will rise to a point approaching the entire GDP, perhaps within the next five years.

There is another aspect to the U.S. public debt crisis. In 2008, the Federal government spent $412 billion on interest payments for servicing of the national debt. Currently, interest rates are at record lows; the U.S. Treasury has even been able to auction off short-term Treasuries at zero interest rates. However, the inevitable erosion of the dollar’s intrinsic value and changing market conditions will drive up interest rates. That, in combination with the rapid growth in the public debt, could mean interest payments soon becoming the largest proportion of Federal spending, even surpassing military outlays. In a few years, debt-servicing costs may exceed one trillion dollars annually.

As if things were not bad enough, the U.S. government has made massive commitments in terms of direct borrowing and backstop guarantees in the trillions of dollars for bailing out the financial, banking, mortgage and even industrial sectors. Except for the TARP program, these massive fiscal obligations are off the books, but may very well come due, at the expense of the already over-leveraged U.S. taxpayers.

Mervyn King has displayed a rare example of candor and intellectual courage among the central bankers and politicians deciding our fate as the Global Economic Crisis intensifies. If only that same level of civic honesty could be replicated across the Atlantic.

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The brief reassurance from Bernanke that the Fed’s printing presses were contributing most of the bailout money being injected into Wall Street as opposed to taxpayers was the single most important revelation from the otherwise monotonous propaganda broadcast on 60 Minutes. For those familiar with technical terminology as applied to monetary policy, Ben Bernanke was indirectly conceding that America’s semi-private central bank was engaging in quantitative easing, on a massive scale.

What is quantitative easing? In essence, it is printing money. In other words, the Federal Reserve, by virtue of the congressional legislation that led to its establishment in 1913, has the sole power and authority to print U.S. currency, at will. At any time. Without congressional or even presidential supervision or consultation. In unlimited quantities. There are some of us that believe that the power to engage in unregulated quantitative easing by the Fed amounts to nothing more than legal counterfeiting. Yet, that is exactly what is going on at the Federal Reserve, and Ben Bernanke confirmed it, though the meaning of his admission was probably rendered opaque to many viewers due to the saturation of praise heaped on the intellectual acumen of Chairman Ben Bernanke.

Largely unseen by the American public, their nation’s Federal Reserve is engaged in a massive expansion of the U.S. money supply. No one outside the Federal Reserve knows all the details, probably not even President Barack Obama. But it must be in the hundreds of billions of dollars, and perhaps in the trillions.

Not only is this manufactured money being used to recapitalize Wall Street firms and cover AIG payments to counter-parties; it may be the means by which the Fed and Treasury Department collaborate in covering the cost of America’s massive and never-ending budgetary deficits. As foreign sources of credit dry up in the midst of the Global Economic Crisis, the Treasury Department seems to be working with the Fed to monetize the debt. This is in essence a Bernie Madoff form of national finance. The U.S. Treasury Department sells its Treasury bonds to the Federal Reserve, and in return receives the output of the Fed’s printing presses.

What is so dangerous about the path that Bernanke seemed to hint at during the 60 Minutes profile of him is that the inevitable outcome is hyperinflation. In fact, behind the scenes, a growing number of expert economists are suggesting that the accumulating national debt of the United States will be so titanic in scope due to the multi-trillion dollar annual deficits the Obama administration is planning for years to come, the only means of rendering such a debt burden sustainable will be to use inflation as a tool to significantly erode its real value.

This approach, in a word, amounts to hyperinflation. It is a road to fiscal calamity, being cheerfully mapped out by Ben Bernanke and company. If anyone still thinks Bernanke’s path will lead to economic recovery, just look at the German Weimar Republic of the early 1920s or Mugabe’s Zimbabwe of today, to comprehend how bad an idea this really is.

Perhaps it would have been best not to have had Ben Bernanke and the Federal Reserve propagandized on 60 Minutes. Far from being reassured as to the competence and skill of the men of destiny leading the U.S. economy, I am even more convinced that the outcome that awaits the U.S. economy is not a happy one. Perhaps this is what Chinese Premier Wen meant when he suggested at his recent news conference that he was worried about the safety of China’s investment in U.S. Treasuries. If the Fed is planning to engineer hyperinflation through quantitative easing and debt monetization, China’s trillion-dollar investment in U.S. public debt could loose most of its value. However, China won’t be alone. As history has shown time and again, a nation’s middle class and many of its wealthy citizens stand to loose much of the real value of their assets denominated in currency undergoing quantitative easing.

Does anyone serving in the U.S. Congress actually understand what the Federal Reserve is planning for the U.S. economy?

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What about the man now at the helm of the Fed, the professorial Ben Bernanke? His record from the time more savvy economists such as Nouriel Roubini were warning that a sub-prime disaster would cripple the global financial system unless policy-makers enacted decisive and coherent responses, has been dismal. History will ultimately judge Bernanke’s stewardship of the Federal Reserve as harshly as it currently does Alan Greenspan, now that all the collective rose-tinted spectacles have been removed. The past year has been a confusion of ad hoc improvisations at the Fed, clearly reflective of a man who has been overtaken by seismic financial and economic events.

Yet, Wall Street is still willing to be fooled again. Ben Bernanke testifies before Congress and the Senate Banking Committee, dropping hints that just “maybe” the recession will end in 2009 and recovery begin in 2010, and by the way the calamitously-managed U.S. major banks will not require nationalization, and a sizeable “sucker’s rally” is sparked on Wall Street. The Chairman of the Federal Reserve also offered this rhetorical sweetener, sure to warm the cockles of the hearts of the corporate tycoons who ran their major banks and financial institutions up the creek; the nation, says Bernanke, “ought not abstain from saving the financial system just because it rewards people who erred”. In other words, the vastly over-compensated and reckless engineers of our global financial demise need not fear the cessation of further bailouts and backstops from the U.S. taxpayers, on top of the trillions already placed on the line.

No matter how dire a situation is, or immense its complexities, an ultimate solution requires more than a “plan” or a “program.” It demands leadership from individuals of impeccable character, intuition, judgement and integrity. In other words, individuals count in this Global Economic Crisis. Ben Bernanke may mean well, however, his being a pivotal (and unelected) decision-maker in determining whether or not the United States and the whole global economy emerges from our current march towards calamity does not inspire confidence about our future.

In word and thought, Bernanke reflects a man detached from the real world consequences of his ineptitude and faulty analysis of the Global Economic Crisis. He must be residing in an alternative  universe, since his policy responses and verbalizations are remote from the human affliction being created by this man-made global economic and financial disaster.

While Bernanke was delivering his congressional testimony with his typical studied and stilted cadence, the most recent S&P/Case Shiller house price index was released, indicating that the price of a single-family dwelling had fallen 18.5% in December, compared with the same month in 2007, the largest recorded decline since the index was created 21 years ago.

As has been said before, the path to hell is paved with good intentions. And no doubt with good intentions, Fed Chairman Ben Bernanke is leading us all into an economic inferno that may ultimately consume whatever sinews of economic recovery still exist.

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