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The first quarter of 2012 was a record-breaking one for the financial markets. The S&P 500 gained more in one quarter than it has since 1998 and the NASDAQ had the best quarter in its history, though still below its all-time high of 5,000.
The first quarter was also a record-setter for junk bonds. High-yield bonds, a.k.a. junk bonds, are issued by less-creditworthy companies (or countries, when they’re called sovereign bonds). The record-setting issuance of this speculative debt can be traced directly to investors searching for more income from their investments. And, of course, this leads us to the Federal Reserve’s doorstep.
Ben Bernanke, Federal Reserve chairman, subscribes to a theory that you can force an economy to grow by encouraging risk-taking. Lowering interest rates will force investors out of the safety of CDs and money markets and into bonds and stocks. Bonds should be anything other than safe Treasury debt, so an effort is made to push Treasury debt as low as possible.
The results are predictable. Money first leaves savings accounts and CDs, and then Treasuries and investment-grade bonds are left behind for dividend-paying stocks. As stock prices increase, the effective yield (dividend/price) declines, sending investors into junk bonds. What’s after junk? We can’t know. What is certain, however, is that the theory of “super-soft money” stimulating an economy has been in clinical trials so long that the Fed is forced to resort not only to low-interest rates, but to pouring money in to create effectively negative rates.
If the economy were a patient in clinical trials, it would have been coded and brought back three times already, only to be given more of the same treatment.
This policy of super-low-interest rates is so destructive that there has to be an explanation why two successive “smart guys” clung to it despite its clear failure. Alan Greenspan, sage of all things money and devotee of Ayn Rand, birthed the policy, despite his avowed distrust of all things centrally controlled.
Famously using his power to “solve” one economic problem after another, Greenspan pushed interest rates to never-before-heard-of rates. Combined with his belief in free markets (one I share), these proved disastrous. Ben Bernake proved an apt pupil.
Taking control of the Fed at a time when the economy seemed to be validating all of Greenspan’s theories, Ben kept right at it. Never mind that, by this time, it was clear that low interest rates were creating a bubble in both the housing market and the stock market.
It defies logic that two smart guys like Alan and Ben both used the same tools to cripple the economy and then kept following the same prescription despite all the evidence of failure. Are they the “forgotten Manchurians?”
“The Manchurian Candidate” is a 1962 film by John Frankenheimer staring Frank Sinatra as Major Marco and Lawrence Harvey as Raymond Shaw. (It was remade with Denzel Washington and Liev Schreiber, but that version wasn’t quite as good). Shaw and Marco are brainwashed by the communists during the Korean War. Shaw is a plant who is to become president and serve his masters. Marco is the unwitting dupe who supports the story of Shaw’s heroics.
I have come to the conclusion that Alan Greenspan and Ben Bernanke are the “forgotten Manchurians,” planted here by the communists to destroy our country. I even have a test to prove it.
The communists like order, that’s why the first Manchurian’s name started with an A and the second with a B. If Ben doesn’t get the job done, and the next Fed governor’s name begins with a C, we will have all the proof we need.
The Federal Reserve has been infiltrated by the communists. And all this time, we thought it was cheap, foreign labor kicking our butt. •