Will ‘Helicopter Ben’ Live Up To His Name & Deliver More Monetary ‘Shock & Awe’? My Guess Is He Won’t Disappoint

On 21 November 2002 Ben Bernanke made a famous speech in which he made the following statement.

“U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

A little later in his speech before the National Economists Club in Washington, Bernanke went on to make his famous statement about using “helicopter drops” to put money into the economy to fight deflation. Ever since then Bernanke’s critics (myself included) have referred to him as “Helicopter Ben”.

Before being nominated by President Bush to succeed Alan Greenspan as Chairman of the Federal Reserve, Bernanke’s time was spent in academia, first attending Harvard and then graduating with a Ph.D. in economics from MIT in 1979. He then went on to do research and teach at Stanford’s Graduate School of Business and then Princeton. His research focused on the role of monetary policy in affecting economic activity, and on the historical analysis of the causes of the Great Depression.

Bernanke is haunted by The Great Depression and believes that it was the Federal Reserve that caused the horrific suffering, deprivation and dislocation America and the world experienced in its wake. Indeed on 8 November 2002, at Milton Friedman’s 90th birthday, when he was invited to speak, Bernanke made the following statement.

“It was in large part to improve the management of banking panics that the Federal Reserve was created in 1913. However, as Friedman and Schwartz discuss in some detail, in the early 1930s the Federal Reserve did not serve that function. The problem within the Fed was largely doctrinal: Fed officials appeared to subscribe to Treasury Secretary Andrew Mellon’s infamous ‘liquidationist’ thesis, that weeding out “weak” banks was a harsh but necessary prerequisite to the recovery of the banking system. Moreover, most of the failing banks were small banks (as opposed to what we would now call money-center banks) and not members of the Federal Reserve System. Thus the Fed saw no particular need to try to stem the panics. At the same time, the large banks – which would have intervened before the founding of the Fed – felt that protecting their smaller brethren was no longer their responsibility. Indeed, since the large banks felt confident that the Fed would protect them if necessary, the weeding out of small competitors was a positive good, from their point of view.


In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn. …


Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

In short, Bernanke believes that the Federal Reserve could have prevented the Great Depression by preventing the money supply from contracting. It is because of this strongly held belief that the Fed (under Bernanke’s stewardship) responded to the current economic crisis by printing money and using it to buy financial assets from banks.

As the global economic “recovery” falters and asset prices plunge (as they are already beginning to) I am convinced that Bernanke will respond with fresh monetary stimulus. I expect that once conditions get bad enough, and enough people are screaming “Save Us Benny, Save Us”, the Ben Bernank will load up his helicopters and follow through on his doctoral thesis. I expect QE3 to be in excess of $1 trillion. He won’t disappoint.

With the announcement of QE3 the scramble for protection from the deliberate destruction of paper money will take on new urgency – a move that will be reflected in the price of the only money that can’t be printed. Gold.

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