Cover Story

The house that Ben built

"The house that Ben built" Continued...

Issue: "Moneymaker," March 23, 2013

But for the foreseeable future, thanks to the policies of Ben Bernanke, massive amounts of assets that in years past would have been in the private sector will be in government hands. Jeremy Siegel and liberal economists such as Paul Krugman think this will not be a problem. “We will grow our way out of the current situation,” Siegel said. “There are currently no signs of inflation, and if the signs show up, the Fed will act.”

Former Fed Governor Kohn agrees. “I do not fear inflation in the medium-term, defined in the next few years,” he said. “There’s enough slack in the U.S. and global economies to keep wage and price pressures in check.” 

Others remain unconvinced. George Melloan is a former editor of The Wall Street Journal’s editorial page and the author of The Great Money Binge: Spending Our Way To Socialism. He believes the nearly 2,000-point run-up in the Dow Jones Industrial Average at least partly reflects what he calls “asset inflation,” which he defines as an increase in price that reflects a “cheapened dollar, not an increase in their real worth.” In addition to the rise in stock prices, he also points to the double digit rise in farm prices coming at a time when farmland itself has been less productive because of “crippling drought” gripping much of the nation. “How could drought-stricken farms be gaining value so rapidly,” he asks, “other than through inflation generated by cheap credit?” 

Melloan says the danger of the current situation is that it produces a “wealth illusion, the belief that pricier assets make one permanently richer. Illusions are dangerous. Eventually, painful reality intervenes.”

Grove City’s Herbener is also skeptical that inflation is under control. “Predicting with that kind of precision what inflation will be two years or more in the future seems implausible, at best,” he said. Nonetheless, Herbener is willing to make a qualified prediction about The House That Ben Built: “We may not be headed for a collapse. It could end up being just a slow and steady decline. It’s virtually certain that without dramatic monetary reform, Bernanke’s policies are leading us into an era of inflation. And despite what people are saying about the troubles we’re in now, I can promise you that double-digit inflation will be worse.”

It will be especially worse for taxpayers and homeowners, who will eventually have to make good on Bernanke’s bonds and will not have the luxury of selling when the market is high and buying back in after it crashes. That’s why even some members of the Fed’s Open Market Committee (FOMC) are quietly calling for a pullback in quantitative easing. The Dow Jones Industrial Average set a record high on Feb. 19, closing above 14,000. But the next day the FOMC released the minutes of its January meeting, reflecting the divided minds of the Fed governors. Over the next two days, the Dow fell nearly 200 points. On Feb. 25, the Dow saw another 200-point fall. On the same day, the market’s volatility index, sometimes called the “fear index,” jumped 34 percent. The next day, Feb. 26, Bernanke delivered his semi-annual testimony before Congress, saying quantitative easing would continue. That stabilized the stock markets and underscored his influence.

Bernanke’s second four-year term ends next January, and two-thirds of economists polled in February by USA Today believe he will step down at the end of his term. Former Fed Governor Donald Kohn says that means it will “be up to the next chairman to lead the exit from these extraordinary polices to avoid the inflation pressure building up.” Bernanke himself has been as tight-lipped about his future as he has been in public pronouncements as Fed chairman. Those close to him think he will end up at a think tank or university.

One thing is sure: He won’t be returning to the home Jonas and Pauline Bernanke built in Dillon, S.C., in the 1940s. In the 1990s, the last Bernanke to live in the large brick house on East Jefferson Street sold it. And in 2009, the house Ben Bernanke left all those years ago went into foreclosure.

Today, as his Bernanke Doctrine and long tenure as chairman are causing some to call the modern Federal Reserve “The House That Ben Built,” many pray that bit of local history doesn’t repeat itself on a national economic scale.

Inside The House That Ben Built

1921 ‣ Jewish immigrants Jonas Bernanke, 30, and his wife Pauline, 25, arrive at Ellis Island from Poland.

1945 ‣ The Bernankes pay $750 for a tract of land in Dillon, S.C.

1953 ‣ Grandson Ben Shalom Bernanke is born in Augusta, Ga.

1960 ‣ Bernanke’s father Philip buys home in Dillon from his father Jonas and moves the family there.

1975 ‣ Bernanke graduates from Harvard.

1996 ‣ Bernanke becomes chairman of the economics department at Princeton.

2002 ‣ President George W. Bush appoints Bernanke to Federal Reserve Board of Governors.

2005 ‣ Bernanke leaves the Fed to become chairman of Bush’s Council of Economic Advisers.

2006 ‣ Bush appoints Bernanke to 14-year term on Federal Reserve Board of Governors and four-year term as its chairman.

2009 ‣ President Barack Obama announces he will appoint Bernanke to a second term.

January 2014 ‣ Bernanke’s current term as chairman ends.

Buying in bulk

Quantitative easing (QE) is the practice where a central bank buys assets from financial institutions using money it creates. In 2010 the Federal Reserve began an open-ended purchase of mortgage-backed securities—known as QE1. QE2 followed in 2010 and QE3 began in 2012. Under Bernanke as chairman of the Federal Reserve, quantitative easing plans will add $1 trillion per year to the amount of assets under government control, bringing the total to $5 trillion by the end of 2014.

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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