As 2008 has shown us, having access to credit is not the same as having access to wealth. Ben Bernanke, the head of the Fed, and famous broker of TARP, has long been seen as an expert of Depression economics. Indeed, Bernanke’s scholarship on the Great Depression is quite impressive.
Bernanke brokered the TARP deal in order to unfreeze credit markets. When $750 Billion were given to the banks, it was designed to open credit to the “average person”. Bernanke (rightly) saw that the freezing of credit, that spurred the Great Depression, was happening again. Bernanke at the same time lowered interest rates to un-Godly levels in an effort to infuse cash into the economy, which was supposed to drive demand. That idea never materialized. The TARP money ended up fueling the “liquidity trap”.
Princeton Economist and Nobel Laureate Dr. Paul Krugman often talks about the “liquidity” trap; the idea that companies believe that they have to sit on mountains of cash (when they don’t) at the expense of labor (vis-à-vis demand). That liquidity trap has entered the mainstream; people want cash, not credit. See the problem? Demand hasn’t just dropped for cars, homes, and other goods, but it has also dropped for credit. Without assuming human behavior, people seem to see the fallacy that credit is the same as wealth, and many homeowners have learned the hard way since 2008.
Case in point is Mr. Bernanke’s statements that the Fed would end its Quantitative Easing policy, driving the markets to raise interest rates up. What happens when interest rates go up are 2 things: 1) less cash is being pumped into the economy, presumably, based on his past statements, something that Bernanke does NOT want, and 2) credit becomes more expensive, and less accessible, especial on (a-hem…) mortgages.
What’s more astonishing for Mr. Bernanke is that he tried to shift the blame for this interest jump on “improving labor markets”. In case Mr. Bernanke was sleeping when the latest jobs report came out, labor markets are not all that rosy. The unemployment rate is stuck at 7.6%, and most of the jobs that were added were low-wage, part-time service sector jobs. It is certainly not a picture where people can afford to buy things, or buy credit. This is supported by the CPI (Consumer Price Index), which shows relative demand for goods. The latest CPI (demand for goods) only grew by 0.5%, and two-thirds of that was because of the price of gasoline. If people cannot afford to buy anything other than gasoline on their new part-time, low wage jobs, then that’s not what anyone (in their right mind) would call an “improving labor market”.
Mr. Bernanke is about to go by the way of (always wrong) Alan Greenspan, or the Dodo Bird if he thinks that low wage, part time labor will be able to afford mortgages (which is credit). Mr. Bernanke rightly saw that freezing credit markets create depressions. However, he either cannot, or will not see that credit is not the same as wealth (hence the idea of a credit trap). Adam Smith even said that wealth has to be accessible to all on order for Capitalism to work properly.