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Ben Bernanke Digits Juggler about to Drop

Politics / Central Banks Dec 11, 2010 - 10:49 AM GMT

By: Gary_North


Best Financial Markets Analysis ArticleAt a circus, there is always a juggler. If he is dressed as a clown, he is not a great juggler. If he is in a sequin-covered tight suit, he is the real thing. He is there to impress us.

The juggler I most remember was a young man who was juggling a bunch of hoops. He was really good . . . until he dropped all of them in his grand finale. They came down in disarray. He picked them up and walked out of the ring. What else could he do? The finale was not so grand.

What if he had been juggling the world 's interconnected banking system?

What if he had been juggling in secret?

What if he had dropped all of the rings?

Ben Bernanke is a juggler. He juggles digits. He juggles them in secret. He does this act behind closed doors. In public, he is always dressed in a business suit. Business suits convey a message: "official in charge."

In public, he puts on an air of mastery. "Yes, I juggle. I know exactly what I'm doing. No, there are no videos. No, there won't be. But, let me tell you, I can handle any amount of digits that anyone tosses at me."

All Federal Reserve chairman juggle digits, but no FED chairman has ever juggled so many in a time of crisis. He got no applause in October 2008. That was because no one got to see just how many digits he was juggling, and how very, very fast he was juggling them.

Your economic future depends on the fact that he does not drop those digits at the wrong moment. So does mine.

I am taking steps to prepare myself for the day when he drops those digits, and they pile up on the floor. Are you?


The extent of his ability is indicated in the 21,000 documents released a week ago by the Federal Reserve System regarding who got how much money in the 2008 near meltdown.

At the time, he preferred that the public not discover just how good a juggler he is. About a third of the $3.3 trillion that the FED lent to the banking system got reported as additions to the monetary base: the FED's balance sheet.

How did the FED keep almost $2 trillion in loans (credit) off its books? How were the digits transferred? No one in the media is asking this. No one in Congress is asking it.

The entire theory of banking rests on a premise: for every bank credit, there must be a borrower's debt, and both must be on the bank's books. But there were about $2 trillion in loans made to banks by the FED in late 2008 for which there was no credit or debt statement. Anyway, that was what we were told in 2008.

These five words come to mind: "Bernie Madoff was a piker."

This was off-the-books juggling on a scale so enormous that analysts simply cannot seem to come to grips with it. What the FED says it did contradicts all modern banking theory. Where did it get the digital money to lend? If the answer is, "by creating it in exchange for assets," I reply: "Then there has to be an entry for each loan. How were these entries concealed? Where are they recorded today?" In short,

"How did the Federal Reserve System inject that much fiat money into the banking system and not leave a trace in its books?"

This should be the biggest single economic question on earth today. I can think of nothing more relevant. It should be the question for graduate-level courses in accounting, in money and banking, and in finance. It should be the #1 question asked by Congress of a subpoenaed Ben Bernanke and equally subpoenaed Federal Reserve accountants. Why issue subpoenas? Because whenever he is not under oath, which is always, Bernanke has three words in reserve that always stop Congress dead in its tracks: "I don't know." This works every time!

There is a great video by a pair of Good Old Boys who make very effective use of a video clip of Bernanke uttering his Congress-paralyzing line. If you have not seen this video, you have a real treat in store.

The mainstream media's response to the procedures used to make these off-the-books loans has been clear: "There is nothing to see here. Move along."

By the way, those words from the first "Star Wars" movie – "move along" – were uttered memorably by Sir Alec Guinness to the mentally bamboozled Empire stormtrooper. The phrase has become part of the American language. This development is altogether positive. The words are right up there with "I am shocked. Shocked!" from "Casablanca." When any writer uses that "Star Wars" phrase, we know that he knows that there is plenty to be suspicious of, but the authorities are playing pretend. The phrase is used a lot these days, but not nearly enough.

Side note. Guinness did not say, "There is nothing to see here. Move along." He said the far more relevant: "He can go about his business. Move along." The trooper replied: "You can go about your business. Move along."

Yes, the media columnists may say that there should be questions raised about the collateral for $885 billion of these loans, information that the FED refuses to provide. The Federal Reserve released this statement on December 3.

The Federal Reserve also provided credit to several systemically important financial institutions. These actions were taken to avoid the disorderly failure of these institutions and the potential catastrophic consequences for the U.S. financial system and economy. All extensions of credit were fully secured and are in the process of being fully repaid.

When asked to provide evidence of the nature of this loan-securing collateral for $885 billion of these loans, the Federal Reserve replied: "Are you serious?" Well, not in those words exactly. It did not reply to Congress at all, so "Up yours, Bozo," is closer to it.

But all this is really neither here nor there in the grand scheme of things digital. The key question is: "How did the FED hide $2 trillion of the $3.3 trillion of loans?"

Don't ask. Don't tell.


Bernanke consented to a softball interview by Scott Pelley on the CBS News 60 Minutes show. It ran on December 5. I reported on that interview earlier this week.

What Pelley avoided was any mention of the previous week's release by the FED – compelled by law – of those 21,000 documents. None of this had been reported by the FED. In other words, it was "off the books." Analysts knew things were bad – an admitted increase of over $1.3 trillion on its balance sheet (the monetary base) – but not nearly so bad as it was.

Bernanke's appearance was a smoke screen. He wanted to appear to be on top of things today, ready to do whatever it takes to preserve market stability. This includes the FED's purchase of $600 billion in Treasury bonds with magic money.

He insisted that the FED was not printing money, which was only a little lie overall – nothing compared to the lies of October 2008 – but this threw Pelley off the scent. This was not the legendary "Helicopter Ben" of his November 21, 2002 speech promising to print money. ( No, no, no: the FED will merely buy T-bonds.

With what?

Pelley failed to ask.

It will buy them with newly created digital money, of course. But that was regarded as too bitter a pill for the viewers of "60 minutes" to swallow, even with a spoonful of sugar. It was instead: "You can go about your business. Move along." He was the victim of Obi-wan-Bernanke's mental hypnosis. Congress has suffered from this for years.

Moving right along, Pelley judiciously avoided asking about what the Federal Reserve had done, how it did it, and how it had concealed what it had done. The program was all about what the FED will do next, and how Bernanke is 100% confident that what the FED does will work.


Here is what we know at this point.

  1. The Federal Reserve was able to conceal $2 trillion in loans to banks and companies around the world.
  2. No one in the media is pursuing this seemingly impossible accounting procedure.
  3. There is nothing to keep the FED from doing this again.
  4. The public will probably not be told when the FED is doing this.
  5. Congress prefers "Don't ask. Don't tell,"
  6. No one at the FED has been compelled to testify under oath regarding unprecedented accounting deception.
  7. Bernie Madoff was a piker.

On December 1, MSNBC's Dylan Ratigan interviewed Christopher Whalen, of Institutional Risk Analytics. Whalen argued that the bailouts in 2008 kept the game going for the big banks. They are still making their money by setting up highly leveraged financial deals that are comparable to what almost brought down the banking system in late 2008.

This is moral hazard at work: no morals on Wall Street, but lots of hazard for Main Street. This is always what happens when the big winners know they will be bailed out by the Federal Reserve and Congress. Heads, they win big, while we win a little; tails, they win a little less big, and we lose very big. Nice work if you can get it.

Will Congress go along with bailouts next time? Maybe not. That is what will make the next few years far more interesting. Always before, Congress has buckled. But the bailout in October 2008 cost the Republicans the Presidency in November. The reaction since 2009 – the lack of recovery – cost a lot of Blue Dog Democrats their jobs in 2010. Congress thumbed its nose at the voters in 2008. Next time, this will be very dangerous politically. "All those in favor of Wall Street, please say 'aye.'"

This leaves the FED as the nose-thumber of last resort. There is no question that Bernanke has been able to thumb his nose at Congress, as have all previous FED chairmen. But he is looking more vulnerable than any previous chairman. For the first time, the FED is under fire by a majority of voters.

They have the Web at their disposal. Going on "60 Minutes" no longer buys Bernanke much support. CBS is headed for the tar pits, along with the other networks.

The banking cartel is still doing well. The man in the street is getting by. The voters who are sitting on huge losses in their homes' value are upset, but they do not know that the FED caused the bubble in the first place, beginning in 1946. The FED got the ball rolling. Jimmy Stewart didn't. Neither did Mr. Potter – not without backup, anyway. The FED and the FDIC are the backup. "Buy a house with 3% down – no problem. Housing prices always go up." Or, as Bernanke put it in May of 2007,

The rise in subprime mortgage lending likely boosted home sales somewhat, and curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters. Moreover, we are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets. All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.

I can almost hear Ben belting this out at a karaoke bar: "Since I had the money, honey, you got subprime!" He still has the money.

Mortgage lending looked like a sure thing. It wasn't. When it blew up, the FED bailed out the big banks. It bailed out the mortgage market by bailing out the recently nationalized Fannie Mae and Freddie Mac. It bailed out big companies. Now it will be bailing out the Treasury.

Meanwhile, the unemployment rate is 9.8%. There have been no parachutes for workers.


Bernanke and his team will at some point drop the digits. That is statistical reality. Like the California quake, the Big One is a sure thing. We just do not know when.

The amount of FED monetary reserves is now enormous. It will grow over the next year, as the FED buys T-bonds. There seems to be no reason for these purchases. T-bonds are paying low rates. There is plenty of demand for them.

The four largest banks now hold over half of the bank assets in the American banking system. The other 8,000 divvy up the rest. Of these, about 100 hold over 20%. Pareto's law tells us that the top 64 banks should hold 51% of the assets, yet only four hold 55%. The system is seriously skewed in favor of the Big Four: Bank of America, Citigroup, J.P. Morgan, and Wells Fargo. These are simply too big to be allowed to fail.

As more and more leveraged assets are being funded by the Big Four, the likelihood of another crisis increases. With each increase in contractual complexity, the ability of the Federal Reserve System's tenured economists to respond effectively is reduced.

These people have no ownership. They have "no skin on the game." We think that subprime loans abused the mortgage system, with 3% down. Federal Reserve economists have nothing down. They can be fired, but they never are. What keeps their judgments accurate?

When the grand finale comes, it will not be grand. But it will be memorable.

When the digits start falling, you had better be out of the way.

Gary North [send him mail ] is the author of Mises on Money . Visit . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

    © 2010 Copyright Gary North / - All Rights Reserved

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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