from John Crudele at the New York Post:
BEN Bernanke now has to deal with his Frankenstein monster.
The head of the Federal Reserve just plain blew it when he and then-Treasury Secretary Henry Paulson decided late in the Bush administration to start pumping money that the US didn't have into the economy.
Paulson's motives last year were obvious -- he was part of the administration whose party was trying to retain the White House.
I have no doubt that Bernanke, a relative newcomer to Washington's inner circle, genuinely believed he was doing the right thing when he agreed to play along.
But, in fact, the former Ivy League professor was really only giving in to the aggressive demands (and commands) coming from Wall Street and politicians.
So, the Fed cut interest rates and blessed spending increases -- and it made those moves so aggressively that there was no ammunition left when the economy kept sinking in the last quarter of 2008 and again in the first months of 2009.
Then Bernanke came up with a novel -- and untried -- approach that he had been tinkering with when he was in academia.
He'd print money and flood the system until the economy got some traction. So what if this had never worked before? So what if this tactic had destroyed other countries' economies?
Just because Dr. Frankenstein screwed up didn't mean Dr. Bernanke's monster couldn't be taught to behave.
Was there really a crisis last year that threatened to undermine the entire financial system -- a "systemic risk" in the catch phrase of the time?
Or did politicians (looking for footing in the presidential election) and Wall Street (looking for an escape from its massive blunders) talk us to the edge of the cliff?
Historians will debate that issue long after I've stopped writing this column.
But this much is indisputable -- now we really do have a problem with the system.
But it is not just the banking system. We've managed to put the whole monetary system at risk. The US economy now isn't just in a recession. It is broken.
Take last Friday as an example. The Labor Department reported one more in a series of lousy employment reports.
Another 345,000 jobs gone from the economy in May, said the Labor Department, and the unemployment rate jumped to 9.4 percent.
Worse, a better government measure of the unemployment rate -- which goes by the nifty name U-6 -- rose to 16.4 percent from 15.8 percent. U-6 was just 9.4 percent this same time last year.
Stock prices rose a bit, but that's not really important.
As I've been saying in this column since last year, keep one eye on the prices of fixed-income securities -- bonds, notes etc. -- and your other eye on interest rates.
Borrowing costs have been rising steadily all spring.
And last Friday we got a sense of just how quickly they might jump even if there is only a smidgen of good news on the economy, like the latest still lousy but not horrible employment report.
Interest rates are not supposed to react this passionately to slight signs of economic improvement.
The system is so taut because of massive spending that borrowing costs shoot higher at the slightest economic twitch.
Banks have been able to report better earnings only because they are benefiting from interest-rate trends (at the expense of customers) and can again hide the deteriorated value of their assets.
Where is the good news? Why are interest rates skyrocketing?
Why are the Chinese of all people pestering the US about budget deficits?
And why is President Barack Obama, incongruously, warning about cutting US budget deficits even as he is spending tax money two hands over two fists?
Because they are all concerned that the US financial system is broken. They are worried that our economy can't respond to normal monetary and fiscal stimulus.
I felt that Washington's decision to open the spigot full blast always carried the risk that the cure would be worse than the disease.
If interest rates continue to climb at the current speed, the cost of borrowing money will cause economic activity to contract even before it has expanded.
Mortgage rates are already up more than a percentage point in the past month and will be going higher this week.
Corporations will also be paying more when they decide to borrow, which will probably make them think twice about doing so.
And Washington will automatically have to pay more to borrow hundreds of billions of dollars in the weeks and months ahead.
Interest rates on 10-year government bonds have already risen 90 percent year to date; 30-year bond yields are 80 percent higher.
Only the insignificant short-term interest rates that the Fed directly controls have behaved.
And there is now widespread talk on Wall Street that the Fed will be forced to raise those interest rates within the next few months. That's a description of broken in any economics textbook.
And here's the real knee slapper in this whole situation -- the labor report that is the latest problem really wasn't as improved as the market believed last Friday.
In last Friday's num ber, for instance, the department added a very questionable 220,000 jobs that it believes were created by newly formed companies.
That included 43,000 jobs that it hopes appeared in the depressed construction industry.
And when the government takes another look at its numbers in the coming months it will probably that more jobs were lost in May than it originally thought.
But the damage will still be done. Interest rates will still be higher. And the system for getting the economy going -- no, we're not there yet -- will still be broken.
