The states are not the country. The banks are the country.

How does that sit with you. What if it said the world is not the world the banks are the world? what if Bollard said,” New Zealanders are not the country. The banks are. ” trust me ladies and gentlemen that is exactly what John Key, Alan Bollard and Don Brash are saying. How does that change feel?

A careful reading of Federal Reserve chairman Ben Bernanke’s op-ed in Tuesday’s Wall Street Journal, shows that Bernanke thinks the economy is in a deflationary spiral that will last for some time.

Ben Bernanke:

“The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit….My colleagues and I believe that accommodative policies will likely be warranted for an extended period.”

No talk of recovery here; just a continuation of the same radical policies that were adopted after the collapse of Lehman Bros. The only sign of improvement has been in the stock market, where Bernanke’s liquidity injections have jolted equities back to life. The S&P 500 is up 40% since March. Conditions in the broader economy have continued to deteriorate as unemployment rises, the states find it harder to balance their budgets, and the real estate bubble (commercial and residential) continues to unwind. The Fed’s policies are Bernanke’s way of saying, “The states are not the country. The banks are the country.” The public seems slow to grasp this message.

Bernanke’s op-ed is a public relations ploy intended to soften the effects of his visit to Capital Hill today. Congress wants to know the Fed chief’s “exit strategy” for soaking up all the money he’s created and avoiding inflation.

Bernanke again:

“The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed.”

This is the core issue. The Fed has built up bank reserves by accepting (mainly) mortgage-backed garbage (MBS) that is worth only pennies on the dollar.

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