Watering the stock market

Keeping the weeds green and tall has been Ben Bernanke's project according to Mike Whitney and Andy Kessler. In recent Wall Street Journal article Kessler wrote:

At the end of the day, only one thing has worked — flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

So, it appears Bernanke's program was successful? It did jump-start the stock market. Well, no, it was not at all successful, Kessler asserts:

Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.

In other words, bubbles explode, and they often damage the society that had lived off the bubble. Mike Whitney's appreciation for Bernanke's intrigue prompted him to draw this conclusion:

It means the revered professor Bernanke figured out a way to circumvent Congress and dump more than a trillion dollars into the stock market by laundering the money through the big banks and other failing financial institutions. As Kessler suggests, Bernanke knew the liquidity would pop up in the equities market, thus, building the equity position of the banks so they wouldn't have to grovel to Congress for another TARP-like bailout. Bernanke's actions demonstrate his contempt for the democratic process. The Fed sees itself as a government-unto-itself.

Alas, the Chinese may no longer want to purchase Treasury bonds. If so, that is, if China abandons the United States, what then? How will Uncle Sam finance its empire? Whitney suspects that American banks will buy up America's new debt, thus establishing a circuit between them and the government that had bailed them out of trouble! Whitney concludes:

So, the bottom line is that the dollar is increasingly balanced on the rotting scaffolding of Bernanke's buyback programs (Quantitative Easing) and the circular purchases from collaborating banks that are concealing their backroom dealings with the Fed.

To keep this game going, Bernanke will have to keep juicing the market while the banks use the $850 billion in reserves (which the Fed has provided in the last year) to keep purchasing US sovereign debt.

Is anyone in Congress watching or is this shell game going to go on forever?

Well, this truism still holds: Things that can't last forever don't last forever. The game must end someday.

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