Friday, July 12, 2013

Bernanke's Latest Doozies

Anyone who has read my posts knows that I despise misplaced declarations of competence by people in positions of influence, especially those who don't demonstrate much of a sense of humor.
[Humble, respected and competent scientist
Heinz Wolff, who does seem to have a sense
of humor. Photo thanks to Wikipedia commons.]

Nice-guy but seemingly humorless Ben Bernanke is a good example of someone whose weighty but sincere utterances have not escaped my disdain. His latest is no exception.
I will cite and comment on only a few of the most irritating phrases:
He first gives a run-down of the Federal Reserve's history. To situate the readers, I'll add that the U.S. was on the gold standard at the turn of the 19th century, and that the Fed was founded in 1913.
"Although the gold standard did not appear to have greatly constrained U.S. monetary policy in the years after the Fed's founding, subsequent research has highlighted the extent to which the international gold standard served to destabilize the global economy in the late 1920s and early 1930s."
This is a completely unwarranted assertion. Some would opine that the gold standard, plus reliance upon the money creation system then in operation, were the only things that could have avoided decades of suffering had they only been upheld in the late 1919s and 1920s after the Fed's creation. I will allow that Bernanke is an educated man, a doctor of economics and a highly respected professor. Therefore, he should know that no facts prove what he claims. Did the gold standard destabilize the global economy and cause the Great Depression, or did the lack of respect for the standard and the breakdown of the former money creation system cause it? Intelligent people disagree. Bernanke's statement only represents a fraction of academic opinion, but he acts as if respectable opposing viewpoints don't exist.
He goes on to say:
"The Great Depression was the Federal Reserve's most difficult test. Tragically, the Fed failed to meet its mandate to maintain financial stability. In particular, although the Fed provided substantial liquidity to the financial system following the 1929 stock market crash, its response to the subsequent banking panics was limited at best; the widespread bank failures and the collapse in money and credit that ensued were major sources of the economic downturn."
Another whammy of an unwarranted assertion. What he is saying is that the Fed response in the 1930's was insufficient, especially compared to the Fed response after the crisis of 2007, which was sufficient. Can anyone prove whether the first Fed response directly caused the "widespread bank failures and the collapse in money and credit that ensued," and whether the second Fed response is a success? I maintain that no one knows for sure, in either case.
He shows an inadvertent moment of modesty:
"The degree to which the gold standard actually constrained U.S. monetary policy during the early 1930s is debated …."
How magnanimous. Then he states:
"… but the gold standard philosophy clearly did not encourage the sort of highly expansionary policies that were needed. The same can be said for the real bills doctrine …."
Who can prove that "highly expansionary policies" were indeed "needed"? Not Bernanke, although we know his opinion on this subject given the explosion of monetary expansion that he sanctioned during his tenure. And don't get me started on the real bills doctrine, which is one of the most sensible institutions banks have ever invented. IMHO, and in that of some very respected thinkers, we'd be in a much better place today if the world had respected the gold standard, maintained the real bills doctrine and stuck with Glass-Steagall.
I continue:
"Historians have also noted the prevalence at the time of yet another counterproductive doctrine: the so-called liquidationist view, that depressions perform a necessary cleansing function. It may be that the Federal Reserve suffered less from lack of leadership in the 1930s than from the lack of an intellectual framework for understanding what was happening and what needed to be done."
I see. So the Austrians (and even John Taylor) are a bunch of dumb-wits who have it all wrong, and today you and your elitist cronies have the correct answers? So why did the 2007 crisis happen in the first place? Where were you smarties six years ago? Weren't you running the show back then? Hmmm.
Finally, a statement with which I agree:
"Volcker's successful battle against inflation set the stage for the so-called Great Moderation of 1984 to 2007, during which the Fed enjoyed considerable success in achieving both objectives of its dual mandate."
But he ruins it with:
"The Fed's many liquidity programs played a central role in containing the crisis of 2008 to 2009. However, putting out the fire is not enough …."
We'll see, won't we, whether all the embers of this fire are truly out. Some believe that the gushing liquidity the Fed has perpetrated on the global economy has done more harm than good. The jury is still out, but we will know sooner rather than later, I believe. I hear Bernanke will be retiring soon, just in time for someone else to reap what he has sown. Woe be to the foolish person who inherits this mess.
A last shot:
"In general, the Federal Reserve's policy framework inherits many of the elements put in place during the Great Moderation. These features include the emphasis on preserving the Fed's inflation credibility, which is critical for anchoring inflation expectations, and a balanced approach in pursuing both parts of the Fed's dual mandate in the medium term."
Okay, so if this is true, why did we suffer through three bubbles, one after the other, since Volcker left the scene: the 1990's dotcom bubble, the 2000's real estate bubble, and the 2010's stock market/commodities/treasuries bubble? On the contrary, what I see since the Great Moderation is a Great Bubble-Blowing Experiment, only this time in asset bubbles that shower short-term profits on speculators. Retail-sector businesspeople are not stupid; they know that raising their prices is just going to turn off the Fed faucet and cause a downturn. So where does all the Fed's inflated credit go that isn't in Fed-stocked bank reserves? Exactly where it shouldn't: Wall Street.
Conclusion: Those who vote for bigger government are asking way too much of our elected and appointed officials. Such delegation of power attracts the overly confident (even nice guys like Bernanke) who will draw their generous pensions even if they make a mess of our lives.