Cross posted from Slobber And Spittle
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.
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.
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.
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.
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.
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?
22 Comments
Spotlight
Support this site!
Subscribe to the newsletter
Advertise on Firedoglake
Send
us your tips
Make us your homepage
About The Seminal
Advanced search
“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.” —-you nailed it !
To quote McGyver, I hate it when I’m right.
Just what has Helicopter Ben done right he missed the collapse of the Housing Bubble and the resulting Bank collapse.
Keeping Ben at the job just tells the banks don’t worry reform is not going to happen. There are many more shoes to drop in this economy that could tank it Ben we can be sure won’t see them coming either.
I see Bernanke as continuing in the tradition of Alan Greenspan – he’s a guy who doesn’t make the politicians, the ones who appoint or confirm him at least, uncomfortable. That’s often more important than being effective at that level.
More evidence for you nailing it.
I attended a town hall held by Rep. Adam Smith (WA-09) last night. On the way out, I noticed a table where people were collecting signatures demanding an audit. I signed it, of course. Turns out the folks who were running it were libertarians. Yet another example of common cause, I think.
It’s bizarre how so few people are interested where all that money went.
No more bizarre than this.
And NOW this ; “It has two options to replenish its insurance fund in the short run: It can charge banks higher fees or it can take the more radical step of borrowing from the U.S. Treasury.”.
Wanna bet which is the choice?
The libertarians are interested. I went to Jim Moran’s Town Hall in Reston, VA last night and stood online for some time right next to two characters who seemed at once to hold extreme conservative views on certain subjects, but who vehemently opposed the big bank bailouts and thought they should have been taken into receivership. On that point we finally found agreement.
libertarian (R)’s were blazingly outraged by the bank bailouts of last year. calls to congress ran 200 to 1 against, across party lines, and plenty of (R) reps refused to vote for it.
then the leadership layers of both parties got involved and did a bit of armtwisting, and the bailout passed, against overwhelming popular opposition.
some of these folks formed a nucleus of what became the Teabaggers, but they let their little party get hi-jacked and they’ll have to start again, ’cause now they are stuck with a lot of strange bedfellows.
I think I know the answer to that one. Guess my taxes will be going up.
Odd thing is, you’d think an audit would be something conservatives would support wholeheartedly for both philosophical and political reasons. Yet you barely hear a peep out of the mainstream press.
This is Krugman at his worst. I have said this a million times but Krugman won’t criticize Bernanke because Bernanke hired him on at Princeton and really moved Krugman’s career into the big time. He is also dead wrong here. Bernanke took a purely monetarist view of the Great Depression which overlooks a lot of other things that were going on and misses that even with regard to monetary policy, as FDR’s later New Deal showed, it wasn’t just the money supply but where it went that was important. As a result, Bernanke was singularly unprepared intellectually to deal with a post-meltdown liquidity trap. He exhausted monetary policy and pushed trillions into one with little effect. As it is, Japanification is the best we can hope for. What we are likely to get from his propping up of a broken and corrupt system of crony casino capitalism will be far worse.
I wrote a diary on Roubini’s endorsement last month. He simply discounts the magnitude of Bernanke’s failure to see and react to an $8 trillion housing bubble. As for the meltdown, he gives Bernanke credit for preventing a collapse, a collapse that would not have threatened if Bernanke had done his job. And of what Bernanke did do, I do not see any of it sticking.
Krugman’s and Roubini’s endorsements say more about how they view the relative importance of their professional integrity and the Establishment to which they both belong.
a guy I read on financial issues is Karl Denninger, and he has been thumping the table for years about the bailouts and the Fed’s opacity.
he is often very technical, but check him out:
http://market-ticker.denninger.net/
Has William Greider made a statement yet? I’m reading his “Secrets of the Temple”which is eye opening regarding the Milton Friedmanization of the Fed.
We are in for more “Shock Doctrine”.
Apparently they DID see this coming, they just…did nothing.
Read and weep:
Brown ‘ignored’ warnings re toxic loans and financial crisis
Classic “Shock Doctrine”
I still believe Congress approved this mess because THEY would have lost THEIR shirts.
This is interesting also:
As FDIC’s Funds Dwindle, Regulator May Need To Ask For More Money
Time to stuff the mattress
Wow! Thanks.
It should be important to note that while the banks may have been stabilized, they’ve not been fixed. Nothing in the realm of regulation or re-regulation has occurred that should give any confidence that the banking sector is any more safe than it was in August of 2008
Yes, and that may or may not be something I wrote in one of the links in the article. Can’t remember, but I’ve written that often enough. Something I did write in that last link is that the way they propped up the banks has left us without the usual re-distribution of incomes that happens at such times. That’s a problem, too.
I hate it when you tell me these things, Hugh. ;-)
I was certainly puzzled at the endorsements Krugman and Roubini gave Bernanke. Much of what I know is wrong about how the Fed and Treasury did to “fix” things I learned from them. So it’s been a bit puzzling. It’s sad if Krugman can’t see past his loyalty to his friend to see that he’s in a position he can’t handle. What might be coloring Roubini’s opinions, I have little idea.
Suspect you’re right about Congress. I wrote as much six months ago, and I’m pretty sure that nothing has happened that would change my mind.
This is OTS, but I collect coins and about 3 years ago I started collecting gold buffalo $50 as a means of saving for my 3 sons education since I knew there was gonna be a financial collapse (funny how I knew and “nobody else” did.) But thats neither here nor there. I stopped putting money in the stock market because of how schizoid it was. I knew Bush was lying about our economy. So this year I called the mint to find out where my coin was as I usually receive them in August only to find out that all coin subscribers have been wiped clean and the mint doesn’t know when they will be produced because theres a shortage of gold blanks. As a law they have to produce them, but they don’t know when and now you have to monitor their availability yourself. I was definately taken off guard.
And no one knows if there is ANY gold left at Ft. Knox.