The one and only thing former Fed chairman Alan Greenspan was consistently right about was free trade. In contrast, Fed chairman Ben Bernanke is fanning the fires of protectionism right where he can do the most damage, in front of the Senate Joint Economic Committee.

Please consider this short exchange between Senator Robert Casey Jr., Democrat, and Fed chairman Ben Bernanke.

Link if video does not play: JEC Hearing (10-4-2011) – Exchange Between Chairman Casey and Fed Chairman Bernanke on China

Bernanke Says Yuan “Undervalued by Significant Amount”

Casey repeatedly tried to get Bernanke to quantify the magnitude of the effect the undervalued Yuan has on the US economy, jobs, and the trade deficit.

Bernanke ducked the question directly but did cite several studies by the IMF and various think tanks that the “Chinese currency is undervalued by a significant amount.”

Bernanke Says “China Blocks Normal Recovery Process

When pressed about jobs, Bernanke did not answer directly.

However Bernanke did state “The concern now is the Chinese currency policy is blocking what might be a more normal recovery process in the global economy. In particular we now have a two-speed recovery where advanced industrial countries like the US and Europe are growing very, very slowly and emerging-market economies are growing quite quickly. In a more normal, balanced recovery would have some more demand shifted away from the emerging-markets towards the industrial economies. The Chinese currency policy is blocking that progress.”

Distortions Everywhere

Bernanke is partially correct. However, so is China when China accuses Bernanke and the Fed of manipulating interest rates. Moreover, actions by Japan, the ECB, and the Swiss National Bank are all “distortionary”.

So were the actions by the Fed and Congress to bail out banks. One dozen wrongs do not make a right, and Bernanke failed to point those things out. Moreover, and more importantly Bernanke failed to warn about the consequences of foolish protectionist legislation.

Shades of Smoot-Hawley

As a self-proclaimed “student of the great depression” it certainly would have been fitting for Bernanke to mention something about Smoot-Hawley and how tariffs greatly magnified problems in the Great Depression.

Instead, Bernanke gave Casey all the ammo he needed to ram through ill-advised legislation. The fact of the matter is the tariffs that Senator Casey seeks will not bring a single job back to the United States.

Depending on the exact nature of the bill and how carried away Congress gets I estimate such legislation will cost somewhere between 500,000 and 2 million jobs minimum. Please see Trade War Threat Looms Once Again; Senate Takes Up Bill to Punish China for Manipulating Currency; How Many Jobs Would Tariffs Create? for my rationale.

I wrote that piece on October 2, wondering if such legislation might pass. Thanks to the complete lack of common sense by Ben Bernanke and his fanning of protectionist legislation instead of defusing it, I now think passage is odds on. If so, expect a global depression if Obama signs the bill.

Solution to the Global Trade Problem

I presented my solution to the trade dilemma on July 8, in Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold’s Honest Discipline Revisited

For a followup please see Global Trade Wars, Smoot-Hawley, and Peak Oil Followup to 12 Predictions from Michael Pettis

By the way, all this talk about “fair trade” is nothing but an excuse to protect favored industries. The US and Europe with their agricultural and energy policies are among the worst.

Lower prices are a benefit to all consumers. Lower prices also provide jobs to the industries that transport and stock those goods, as well as to the industries (restaurants etc.) that serve the transportation workers. No jobs will be saved by forcing prices higher. Those are the simple facts of the matter.

Mike “Mish” Shedlock
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