My younger brother Rob Roy, his wife Katje and my nephew Jason dropped by my office this afternoon. After my final consultation of the day, we all went out to an early repast at Morton’s, followed by a performance of Hair at the Kennedy Center. Word has it that audience members wearing sufficiently authentic 1960’s period attire get to go on stage and join the cast members for the finale, so all three of them came dressed like denizens of either Haight Ashbury or the East Village, take your pick, circa the Tet Offensive. According to what I’ve seen in the history books and documentaries, they did a pretty good job, too. The idea was, I would make everybody some of my legendary cappuccinos, and then we would hang around for a few minutes enjoying them before departing for dinner. But no sooner had I handed Rob his cup and set my own before me, with scarcely a moment in between for any of us to take our first sip, then Gretchen rang my desk phone.
“I’ve got some clown named Ben Bernanke on Line One,” Gretchen informed me. “And can I have some of that coffee?”
“Sure,” I told her, “put him through, then help yourself to mine. I’ll make some more for myself later. But be very quiet when you come in.”
“It’s the chairman of the Federal Reserve System,” I told Rob’s little family as I picked up, “and I’m going to put him on speaker phone, so no talking, okay?”
Rob, Katje and Jason were all smiles, nodding affirmation. As one, they pulled out their iPhones and began texting me. And as they did, I picked up my Blackberry and flicked Dr. Bernanke on.
“Hello?” Bernanke queried, “Tom Collins?”
“None other,” I assured him as Gretchen crept in, and, noticing what everyone was doing, sat down on the couch with my coffee, pulled out her Droid and, likewise, began texting me. “How can I help you, Chairman?”
GRETCHEN: Who is this [expletive], anyway?
ROB: He’s the head of the US banking system – he’s the Chairman of the Federal Reserve.
“Well, Tom,” Bernanke confessed, “it concerns the current round of quantitative easing.”
GRETCHEN: Current round of what?
KATJE: Spending government money to prime the pump and get the economy off its [expletive].
JASON: Is that the QE2 they’re talking about on the news?
ROB: It sure ain’t no ocean liner.
JASON: Huh?
ROB: Never mind.
TOM: It’s six hundred billion bucks, what it is.
GRETCHEN: Was there a QE1 then?
KATJE: Yeah – and that was about two trillion.
“Ah yes,” I acknowledged. “It seems that the critics of QE2 range from the sublime to the ridiculous; which is to say, from Wolfgang Schaeuble to Sarah Palin.”
KATJE: Who’s this Wolfgang Schnitzel guy?
TOM: Herr Dr. Schaeuble is the German Minister of Finance.
“Yeah,” Bernanke sighed, “I mean, who cares what some crazy woman from Alaska thinks…”
ROB: Too damn many ignorant morons, that’s who.
“… but when Wolfgang Schaeuble calls me ‘clueless,’ that hurts.”
“And,” I observed, “he’s not alone, apparently. “Although Zhou Xiaochuan…”
JASON: His name sounds like a sneeze!
TOM: Gesundtheit! He’s the head of China’s central bank.
“…Christine Lagarde…”
GRETCHEN: Who?
ROB: French central bank.
“…and Jean-Claude Trichet…”
ROB: Head of the European Union central bank.
“…were all considerably more tactful in their criticisms.”
“Damn it,” Bernanke groused. “Don’t they know I got a 1500 on my SATs? That I was summa cum laude in economics at Harvard?”
“Sure they do,” I confirmed. “How could they possibly forget? After all, you remind them of it constantly. But, on the other hand, they also know that you had to refinance your home on Capitol Hill in 2009 because you had an adjustable rate mortgage that exploded.”
GRETCHEN: WTF? He’s the most powerful banker in the world and he can’t manage his home mortgage?
KATJE: That was his own money. At the Federal Reserve Bank, he gets to play around with America’s money, and he’s MUCH better at that.
“Oh come on, Tom,” Bernanke chided. “It’s not like I’m the only person in the United States who didn’t see the real estate bubble was about to burst.”
JASON: Holy [expletive]! What kind of excuse is *that*?
ROB: The kind any Ivy League snot can make at the drop of a hat.
KATJE: Right – when you’re from Harvard, everything is always somebody else’s fault.
“I suppose not,” I allowed. “The Fed missed the Internet bust and the financial market collapse of 2008, too, and so did a lot of other people. People with extensive business experience…”
ROB: Which Bernanke has none of.
GRETCHEN: No [expletive]?
“…significant policy experience…”
KATJE: Strike two!
“…and elected political power.”
JASON: Strike three?
TOM: Yep. None of the above for Dr. Bernanke.
“Exactly my point,” Bernanke confirmed. “If they couldn’t predict the future, why should the Chairman of the Federal Reserve Bank be able to?”
“An interesting question,” I mused. “I guess you’re right. Who, for example, could have predicted that if the Federal Reserve lowered the interest it charges major banks to a fraction of a percent above zero, those banks would borrow money at that absurdly low rate and buy risk-free US Treasury bills with it instead of lending it to businesses where it could create jobs and get the economy running again?”
ROB: Excuse me – wouldn’t the Japanese know that?
KATJE: Yeah, because isn’t that what happened when their central bank cut interest rates to practically zero?
GRETCHEN: [Expletive]! If that’s true, this damn fool [expletive] should have known from the very beginning it wouldn’t work!
TOM: Now, now, he’s not a damn fool [expletive], he’s banker. There’s a difference. I think.
“Why, nobody,” Bernanke sagely intoned. “But that’s the problem – if you’re the Chairman of the United States Federal Reserve System, people automatically assume you can work miracles or something.”
“Well,” I dryly commented, “some people might contend that creating six hundred billion dollars out of thin air is nothing short of miraculous.”
GRETCHEN: Money from thin air? What the hell is Tom talking about?
And at that, Bernanke began to laugh – it started out as a giggle.
ROB: The United States has what guys like Tom and Bernanke call “fiat money.” Nothing like gold or silver actually backs it up.
Bernanke’s giggle turned into a prolonged chuckle.
GRETCHEN: Nothing?
JASON: Nada. Zip. Bupkis. It says so right on the money – not “Silver Certificate” – no, it says “Federal Reserve Note,” whatever that means.
KATJE: The Dollar is like Monopoly money, except that you can buy stuff besides Park Place and Boardwalk with it.
Bernanke’s chuckle bubbled over into an extended guffaw.
ROB: Because people believe they can. It’s the biggest collective hallucination in history.
Bernanke’s guffaw morphed into an extended, demented, gibbering cackle.
KATJE: Tom says, every day, bankers create fiat Dollars whenever they make loans.
JASON: And that the Fed can conjure them up any time it wants.
ROB: So therefore, inflation is absolutely necessary to sustain economic growth.
“BWAH-HA-HA-HA-HA-HA!” The sound of Bernanke’s demonic mirth, all tinny and thin, spewing from my desk telephone speaker, echoed off the rafters like the cry of a vampirous banshee.
GRETCHEN: You mean Bernanke and Tom think inflation is *necessary*?
“Good one, Tom,” Bernanke panted. “I must admit, monetary policy can be pretty [expletive] funny if you think about it.”
“But monetary policy,” I opined, “is like sausage. If you want to enjoy it, you had better not watch it being made.”
That one caught Bernanke with his guard down, apparently, because it set him off on another extended laughing jag.
GRETCHEN: You mean I work my [expletive] off for little green pieces of paper that aren’t actually worth [expletive]?
ROB: We all do.
KATJE: And unless more and more fake Monopoly money gets injected into the scam – I mean the economy – the whole house of cards falls down.
JASON: Because if people lose faith in their fantasy money, then everybody’s [expletive]!
KATJE: And usually, the Fed can get things going when they slow down by lowering interest rates so that banks can create more dollars by making more loans.
ROB: But this time, it didn’t happen, because the bankers are too paranoid to loan money anymore.
KATJE: And the Fed can’t lower interest rates below zero – even THEY aren’t that crazy.
ROB: So the only thing left is – abracadabra! Six hundred billion dollars magically appear! Poof! Like that!
GRETCHEN: Tom? Is there LSD in this coffee or something?
TOM: I know this is all a bit shocking for a nice farm girl from Pennsylvania Dutch country like you to find out, but although somewhat simplified, Rob, Katje and Jason are essentially correct.
GRETCHEN: God Almighty save the United States of America!
TOM: Exactly what I say every morning when I get out of bed.
“Yeah, yeah,” Bernanke choked out, “and no doubt about it, that’s vastly more amusing when applied to economics than to politics. Too bad Otto von Bismarck isn’t here to appreciate the irony. And Tom, I think you hit the nail right on the head there, too, because there is this pervasive perception that QE2 is going to create massive inflation.”
“You’re absolutely correct about that,” I affirmed. “The public, in general, simply doesn’t realize that, having gone as far as it can go to reduce short-term interest rates, the Fed’s best next move would be to attack long-term rates by purchasing Treasury bills, thereby pushing their price up.”
GRETCHEN: What do US government bond prices have to do with long-term interest rates?
KATJE: When bond prices go up, their effective interest rates go down.
GRETCHEN: Bonds are debt, right?
JASON: Yeah.
GRETCHEN: So bankers buy and sell other people’s debts?
KATJE: That’s what got us into the mess we’re in now.
“Exactly,” Bernanke confirmed. “And they ought to be damn grateful to me for making a thirty-year mortgage more tempting! But do I get any thanks for that? No! Instead, they complain I’m goading Obama to spend even more money America doesn’t have! I mean really, Tom, have you ever heard a bigger bunch of bull [expletive] in your entire life? We both know that there’s no shortage of world wide investors who want to buy T-bills! And besides, I’m a Republican! Doesn’t anybody remember that anymore?”
GRETCHEN: But if there’s no shortage of people who want to buy T-bills, then why does the Federal Reserve have to buy them?
ROB: Ben Bernanke isn’t buying T-bills because he HAS to – he’s buying them because he WANTS to.
GRETCHEN: With six hundred billion dollars the Federal Reserve Bank just pulls out of its [expletive]?
KATJE: To create more inflation.
JASON: To stimulate our funny-money economy.
ROB: So we can all keep our jobs.
TOM: Especially Dr. Bernanke.
“I would surmise,” I suggested, “that they are just somewhat concerned because the current US budget deficit, as a percentage of GDP, is almost as big as it was at the end of World War II.”
“Yeah,” Bernanke conceded, “but it’s not like we’re doing this to keep the federal government’s cost of borrowing down, or anything like that.”
“Of course not,” I tactfully replied. “Everyone in Washington knows you’re much too ethical to do something like that. It does appear, however, that the rest of the world has now taken an intense interest – no pun intended – in QE2, primarily because they are concerned it will depress the value of the Dollar relative to the Yen, the Euro, the Yuan and the Won, thus adversely affecting the balance of trade with foreign markets.”
GRETCHEN: Am I hearing what I think I’m hearing? Is he saying that besides creating inflation, he’s out to make my dollar worth less when I take my vacation in Amsterdam next June?
ROB: Yes, that’s exactly what he’s saying.
TOM: But it will only be a side effect. If the Fed was bent on devaluing the Dollar, it would start selling them, and it hasn’t done that since 2000.
GRETCHEN: Oh, great – that makes it all better, now doesn’t it?
“So some American tourists come home with fewer souvenirs,” Bernanke grumbled. “It seems to me that’s a small price to pay for creating thousands of American jobs.”
“Some have contended,” I reminded him, “that QE2 could create massive bubbles in the commodities markets, and forward-looking speculation in grains seems to have confirmed fears that…”
“No way,” Bernanke interrupted. “It’s the weather! Really, Tom, don’t tell me you believe that nonsense about QE2 exploding the futures markets!”
GRETCHEN: Now what are they talking about?
KATJE: Fixing Thanksgiving dinner this year?
GRETCHEN: Yeah. So what?
ROB: Check out what you have to pay for the turkey. The shylocks in the soybean pit at the CBOE anticipated the effect of QE2 weeks ago and grain prices have gone through the roof.
TOM: Look at it this way, folks – that’s really good news for grain farmers.
JASON: But not ranchers or turkey growers, huh?
TOM: They don’t call economics “the dismal science” for nothing, J-boy!
“So,” I ventured, “it seems that your primary concern is the current public perception of QE2.”
“Not really,” Bernanke sighed in a thoughtful tone. “I honestly don’t care what people think of QE2 now so much as I care about what they will think later. If it works, of course, I’ll be a hero. But it if doesn’t, well…”
“You need an alterative,” I concluded, “some sort of Plan B, as it were.”
“That’s it,” Bernanke proclaimed with a voice of true certainty. “I couldn’t have put it better myself – if this QE2 thing falls through, I need a Plan B. So, Tom, what is it?”
“Mr. Chairman,” I slowly intoned, “right now, with QE2, the Fed is conjuring up six hundred billion dollars, and who are you giving it to?”
“Why, the banks,” Bernanke responded after just a moment of hesitation. “In exchange for their T-bills, we’re creating deposits on their balance sheets, giving them funds with which to stimulate the economy.”
“And if that doesn’t work,” I continued, “if the official unemployment rate remains near ten percent, and the actual rate lingers at God knows what, while prices rise and long-term interest rates fail to decline, you, as Chairman of the Federal Reserve, would like to know what to do next?”
“Yes,” Bernanke responded in a slightly nonplussed voice, “that’s… uh, yeah… sure, that’s what I want.”
“How about this, then?” I recommended. “Have the Fed go get another six hundred billion dollars from nowhere and send all three hundred and thirty million United States citizens a check for $1,818.”
“Jesus H. Christ on a crutch!” Bernanke exclaimed. “Wouldn’t that be incredibly inflationary?”
“Maybe so,” I confirmed, “but I guarantee, it would make you very, very popular – and it might even stimulate the economy, too!”
“Interesting idea, Tom,” Bernanke said. “I’ll definitely keep it in mind.”
GRETCHEN: Wooo-hooo! My boss is a [expletive] genius!
ROB: Way to go, bro!
KATJE: I’m spending my entire check at Nordstroms, Nieman-Marcus, Bloomingdales and Saks Fifth Avenue!
JASON: Tom, you’re the best uncle a guy ever had!