Tuesday, August 25, 2009

The Audacity Of Dopes: Bernanke Re-Appointed

I'm sure you recognize the guy on the left. The abandoned building on the right is the Fisher Body Plant. Image credit: Jalopnik

In case you haven't heard yet, we're in for another four years of Ben Bernanke as chairman of the Federal Reserve:

Federal Reserve Chairman Ben S. Bernanke, named today to a second term as central bank chief, pledged to work toward restoring stability to financial markets and the economy.

“I will work to the utmost of my abilities” to help “provide a solid foundation for growth and prosperity in an environment of price stability,” Bernanke said today in a Martha’s Vineyard, Massachusetts, news conference in which President Barack Obama nominated the 55-year-old Fed chairman to a second four-year term. Obama praised him for “preventing” another Great Depression.

Bernanke Pledges to Restore Stability to Markets, Economy

As someone who isn't an economist, I'm struck by the difference of opinions on this subject from economists who are worth listening to. By "worth listening to", I mean those who had the intellectual honesty and knowledge needed to predict the bank collapse of last year. Among those people, there is a mix of opinions about whether this is a good appointment.

On the "pro" side, we have Princeton Prof. Paul Krugman:

Generally, I’m pleased. Bernanke has done a good job in the crisis — he’s been far more aggressive and creative than almost anyone else would have been in his place, partly because he’s a scholar of the Great Depression, partly because he took Japan’s lost decade seriously and was therefore intellectually prepared for a liquidity-trap world.

I do have one qualm, though, which isn’t really about Bernanke, but rather about the broader symbolism of the reappointment — namely, it unfortunately seems to be a reaffirmation of Serious Person Syndrome, aka it’s better to have been conventionally wrong than unconventionally right.

On The Reappointment Of Ben Bernanke

NYU Prof. Nouriel Roubini, who was one of the Wall Street eoconomists most aware of the conditions that caused the crisis, concurs:

To be sure, an endorsement of Mr. Bernanke’s reappointment comes with many caveats. Mr. Bernanke, a Fed governor in the early part of this decade, supported flawed policies when Alan Greenspan pushed the federal funds rate (the policy rate set by the Fed as its main tool of monetary policy) too low for too long and failed to monitor mortgage lending properly, thus creating the housing and credit and mortgage bubbles.
Still, when a liquidity and credit crunch emerged in the summer of 2007, Mr. Bernanke engineered a U-turn in Fed policy that prevented the crisis from turning into a near depression. He did this largely with actions and programs that were not in the traditional toolbox of monetary policy. The federal funds rate was effectively pushed down to zero to reduce borrowing costs and prevent the collapse of consumer demand and capital spending by business. New programs encouraged skittish institutions to resume lending. For the first time since the Great Depression, the Fed’s role as lender of last resort was extended to investment banks.

The Great Preventer

What I get from these two recommendations is that while he could have done better regarding policy, Bernanke plays the political balancing act as well as one could expect, and he improvised pretty well. Both recommendations certainly came with caveats.

Meanwhile, there are a few folks who might disagree as to the effectiveness and the quality of Bernanke's actions. One is National Bureau of Economic Research economist Anna Schwartz:

AS Federal Reserve chairman, Ben Bernanke has committed serious sins of commission and omission — and for those many sins, he does not deserve reappointment.

Mr. Bernanke seems to know only two amounts: zero and trillions. Before 2008 there were only moderate increases in the Federal Reserve’s aggregate balance sheet numbers, but since then the balance sheet has exploded by trillions of dollars. The increase was spurred by the Fed’s loans to troubled institutions and purchases of securities.

Why is easy monetary policy such a sin? Because in such an environment, loans are cheap and borrowers can finance every project that they dream up. This results in excesses, and also increases the severity of the recession that inevitably follows when the bubble bursts.

Man Without A Plan

Ironically, as I've observed before that capital hasn't been easy to get for industry and other concerns that need it. What we seem to have is the kind of economy Krugman predicted months ago - an economy doomed to slow or negative growth for the next decade or so. That's the price of the government's making the choice to prop up the banks versus letting that part of the economy re-establish itself.

Naked Capitalism's Yves Smith also seems not to be a fan of Bernanke's, as she stated in a review of another New York Times editorial on Bernanke's potential appointment:

Of COURSE Wall Street loves Ben. He's written lots of blank checks to them, and demanded nothing in return. The fact that the New York Times isn't willing to consider the obvious self-interest in their views, and further consider that what is best for Wall Street is not what is best for America shows a remarkable lack of perspective.

New York Times Joins Bernanke Fan Club

Finally, Ian Welsh noted today:

Bernanke bailed out the banks and the rich. You know this, but what is not clear to many people is that bailing out the banks and fixing the banking system were not connected at the hip. It was possible to fix what was wrong with the banks by taking the big banks into receivership and then using them to lend directly. Wipe out the shareholders, write down the bondholders to the actual value of the banks, but keep lending to the real economy, and indeed increase lending and capital flows, by, say, deciding to refit every single building in America for energy efficiency and generation, and to take every clunker off the road.

Road to Ruin: Bernanke’s Reappointment Is Just The Status Quo

Ian has summarized well the alternatives that Bernanke faced. The consequences of letting the banks that were to fail go into receivership would have reached beyond the filthy rich, of course, but I have to think that we're seeing some of those consequences anyway. Thanks to Bernie Madoff and other fraudsters, many funds that depend on banks are in trouble already. The fact is that the federal government's lack of real regulatory powers in the last few years has already hurt the little investor big time.

The government's monetary policy these last couple of decades has favored the financial interests over manufacturing and small business, not to mention homeowners. Bernanke's been a willing part of that policy.

My own take on the Bernanke appointment is that it's yet another sign that nothing is changing as a result of the trauma our economy has been through, and that things aren't going to improve for the foreseeable future.

In addition, I think that the nearly universal observation that Bernanke didn't see this catastrophe coming is very telling. Why didn't he? It's his job, and he'd had it for nearly three years when the crisis hit in early 2008. It certainly looks to me like he didn't do that part of the job well. That he might have done as well as anyone else could have in that environment is a conclusion I find suspect on that basis.

If you can't see what's coming, how can you see where to go?

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