Ben Bernanke is the Fall Guy

Growing up in the 1970s, I watched a TV show that starred Lee Majors - and Heather Thomas - called the Fall Guy. It was about a Hollywood stuntman who moonlighted as a bounty hunter. Stuntmen are called 'fall guys' because they take the punishment so the star of the show doesn't have to.

Why am I talking about a 70s TV show on a financial blog? I think about the current situation with Ben Bernanke at the helm of the Federal Reserve. Financial commentators on TV, radio and the Internet are criticizing Bernanke for not 'doing enough' to make the sub-prime mortgage/real estate bubble go away. The problem is that Bernanke isn't the one who caused this problem, but he's supposed to fix it.

The "Maestro" himself (aka Bubbles and Mr. Magoo), Alan Greenspan, was the one who caused this money creation and easy credit bubble - first in stocks, then in real estate - during his term as Federal Reserve chair. Ben Bernanke is now the 2000s version of the Fall Guy to blame for when these problems hit the proverbial fan.

I don't think "Helicopter Ben" is the best guy for the job because he's an Ivy League academic (who usually have the least amount of common or financial sense), and because he's hell-bent on avoiding another deep recession or repeat of the Great Depression. His solution is to crank up the printing presses, and flood the system with fiat currency. The only problem is that this will cause a hyper-inflationary (then deflationary) recession/depression, because the purchasing power of the currency will have been deeply eroded.

While it may prop the financial markets up in the short term, there's nothing the Fed can do to avoid a recession in the long-term. As Paul Farrell of CBS Marketwatch says, "Recessions are natural, positive, healthy... and inevitable." Because politicians have a low tolerance for seeing a recession on their watch (to preserve their incumbancy and legacy), the Fed has done the bidding of incumbents to ward off a recession at all possible costs.

The recent Bush/Paulson mortgage bailout is a prime example. This will only delay the inevitable correction in over-valued real estate prices, and the needed correction in the economy. I've noticed a lot of stupidity in the real estate and financial planning business, maybe a good recession is what's needed to re-inject a much-needed dose of common sense back into our markets and society.

The Mother of All Bad Ideas

Peter Schiff hits it on the head with his latest column. President Bush and Secretary Paulson are putting the best possible spin on this proposal, and how it will alleviate problems in the sub-prime and overall housing market. But the only thing that will "solve" this problem is time, sanity and better lending practices.

Whenever government gets involved to 'help' free markets, bad things happen. As Schiff eloquently says, this is a stay of execution for the real estate market instead of a pardon. A majority of Americans are over-leveraged with bad debt (credit cards, auto loans and home mortgages on their residences) that doesn't put any cashflow into their pocket.

While a growing number people are focused on rapidly-declining (or negative) equity in their homes, they're ignoring the most important part of personal or business finance - cash flow. The flow of cash is to a business or household what blood is to the human body. These high levels of debt Americans have incurred to finance their rock-and-roll lifestyle, are clogging their financial arteries (and reducing the net positive flow of cash) like a baked potato loaded with sour cream and butter constricting human blood vessels.

The only way to solve cardiovascular and financial problems is to make healthier financial choices - cut back on bad debt... learn to sell and market... start your own (or a more profitable business). I'd recommend reading authors such as Peter Schiff, Robert Kiyosaki, and Dave Ramsey. All three are healthy oases of common sense in an increasingly insane world.