By: John Tamny
Real Clear Markets
January 31, 2014
Ben Bernanke will mercifully depart the Federal Reserve today after two tumultuous terms as its Chairman. To say that his time at the top of the world’s foremost central bank has been marked by failure is to shoot fish in the most crowded of barrels.
In Bernanke’s defense, it’s hard for most Chairmen to succeed in this role owing to the market reality that the Fed is superfluous, and its very existence speaks to the economic destabilization that it allegedly was formed to eradicate. The Fed, no matter the individual in charge, fails precisely because the conceit that keeps it alive is anti-growth, anti-banking, and anti the very dollar the health and stability of which is the most important input for economic growth in the world.
The title of this piece talks of Bernanke arriving under false pretense, and this is firstly rooted in Bernanke’s convenient advertisement of his being a Republican while George W. Bush was in the White House. Glossing over for the purposes of this piece how little Bush’s economic policies had to do with historical Reagan Republicanism, it should be said that Bernanke is/was a Republican in the way that Phil Gramm was once a Democrat. Indeed, even in the debased state of today’s GOP, it’s rare for Republicans to be so public in their support of Keynesian spending stimulus in the way that Bernanke has long been.
More broadly, Bernanke, lusting for the power that would come with being Fed Chairman, eagerly politicked for the job inside and outside Washington, D.C. Perhaps aware of a long paper trail that spoke to views that would make him most comfortable in the Democratic Party, Bernanke courted numerous commentators on the right, and told them he didn’t possess the traditional central banker’s view of money. Some were initial skeptics, some of them had the ear of decision-makers inside the Bush administration that ultimately appointed him, and presumably sensing this, Bernanke cast himself as a pro-growth economist who, while at the Fed, would pay attention to signals like the gold price when conducting monetary policy.
Who cares that Bernanke had long made the wildly false assertion that the gold standard caused the Great Depression? Eager to be appointed, he signaled an open door to his future thinking at the Fed, and as this kind of information is rather valuable, suddenly more than a few commentators on the right went public with laughable commentary confirming for their willing-to-be-convinced readers that Bernanke didn’t believe growth caused inflation, that his views on taxation and spending were supply-side, and that he wasn’t averse to a dollar-price rule that had largely informed Fed policy from 1983 to 1997.
What’s interesting is that if readers and commentators back in 2005 didn’t have time to read or review Bernanke’s speeches that confirmed his Keynesian, anti-dollar price rule mindset, all they had to do was read an Op-ed he had published in the Wall Street Journal in the summer of ’05. Within it, he made plain that tax cuts only work in the near-term Keynesian view of same, plus he reiterated his long-held position that economic growth – you know, people working and prospering – causes inflation. With the latter, Bernanke made fairly explicit his views on money; specifically that the stable money values that would remove inflation as a factor would in no way inform his policies if appointed to the Fed.
About the seriously discredited notion that economic growth causes inflation, explicit in such an incorrect belief is that the U.S. is an island; that producers in the U.S. don’t access the world’s supply of labor and capacity when engaging in commerce. Second, it suggests that the supply of labor is static such that workers don’t migrate to labor shortage locales, not to mention that businesses don’t innovative around labor shortages. Considering the latter on its own, it’s been at least a decade since I dealt with a live human being while buying an airplane ticket, filling my car with gasoline, or in depositing checks at the bank. Much of this was stated in a column by me for National Review Online in August of 2005 in which I asserted that Bernanke was a wrong and every dangerous choice for Fed Chair, but the protests predictably fell on deaf ears.
By then Bernanke had promised the influential on the right access to his future Fed, and soon enough glowing commentary about a pro-growth, dollar focused central banker became the norm. Within a few months, Bernanke had the nomination, and his confirmation was all but a foregone conclusion.
So while many on the right publicly and not-so-publicly celebrated his nomination, markets told the real story. While gold was trading in the $480 range in the fall of ’05, by January of the new year it had shot up into the $600s. Bernanke’s nomination was a negative dollar event, and to his everlasting credit, Steve Forbes was willing to point out what a silenced right would not about President Bush’s new Fed Chairman.
Writing in the January 9, 2006 issue of the magazine, Forbes very presciently wrote:
“Ben Bernanke, Greenspan’s about-to-be successor, disdains gold as both an indicator and a guide to monetary policy; he won’t be prepared for what’s going to hit him. He’ll look at the Fed’s multitudinous measures of money and conclude they haven’t grown enough to cause inflation.
Given his statements that gold is an obsolete, if not destructive, guide to monetary policy, Bernanke is not likely to recognize the inflation problem until it hits him-and the economy-square in the face.
Bernanke should let short-term interest rates float and simply mop up the excess liquidity until the price of gold comes down to a tad below $400 an ounce, a price still above the average of the past ten years. Sadly, such a timely, sensible approach is so beyond Bernanke’s mind-set-not to mention that of most other economists and policymakers-that he’ll never do it.”
Steve Forbes hit it on the head. Though Bernanke bought silence from flattered commentators with a false accounting of his own views, Forbes wrote the truth, and in doing so, foretold major problems ahead. Indeed, he predicted “morning-after headaches” within a year, and he was right.
The simple truth is that when money is declining in value, investors don’t just sit back and do nothing. Buyers of future dollar income streams when they put capital to work, they correctly sensed a decline in the value of the dollar that would make hard assets – think housing, gold, rare stamps, art – a better bet; one that would protect them somewhat from the dollar’s evisceration. In short, devaluation signaled a worsening economy as investment flowed into hard assets representing wealth that already existed, over investment in the stock and bond income streams which represented wealth that didn’t yet exist.
In Bernanke’s defense, the dollar’s decline predated his arrival at the Fed, but it’s worth reiterating that his arrival was a negative dollar event that revealed itself with much greater force once he was seated. His arrival signaled to the marketplace that the Bush administration favored a weaker dollar. The markets complied, administrations always get the dollar they want, and thus gasoline was poured on the economy-sapping fire that was the housing boom.
What must be stressed here is that a purchase of a home is not investment, rather it’s consumption. When one buys a house such an ‘investment’ will not make one more productive, open foreign markets, cure cancer, or lead to software innovations that make businesses more efficient. Housing, though necessary, is consumption at the expense of real growth.
And with the falling dollar logically making housing more attractive as it always has, investment flowed in that direction such that the economy weakened. This proved problematic in the certain sense that large mortgages were increasingly difficult for individuals to remain current on as the economy sagged. The result was that housing didn’t even need to correct for banks to run into trouble.
Importantly, housing’s moderation and resulting problems in the banking sector on their own couldn’t have caused a financial crisis. Markets adjust for errors all the time, and had the banks far too exposed to housing been allowed to fail so that they could be purchased by competitors, the economy and banking sector would be fine today. Enter Ben Bernanke.
Figure the Fed is charged with overseeing the banks, such a job is logically impossible, and Bernanke proved ably proved the previous assertion. In a speech given in June of 2007, he asserted that “the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.” If regulators had a clue about the future, they would be earning billions in the private sector.
Still, failure of any business is a sign that capitalism is working, that poor business practices are being erased. George Gilder has observed that crises may in fact “be growth spasms,” and it’s certainly true that the banking sector would be healthier today absent all the intervention. If Bernanke had shared this view, there would not have been a financial crisis; “financial crisis” merely a polite phrase obscuring the real problem which was government intervention. Instead, once it became apparent that many financial institutions were in serious trouble, Bernanke erred on the side of bailing them out. As he told House Speaker Pelosi in 2008, “I spent my career as an academic studying great depressions. I can tell you from history that if we don’t act in a big way, you can expect another great depression, and this time it is going to be far, far worse.”
Let’s think about that for a second. Figure Japan and Germany not only each lost a generation of their best and brightest in World War II, both countries were also literally reduced to rubble by bombs; Japan having lost two cities to atomic bombs. Yet within a few years of the war’s end, both economies were booming again.
In light of the WWII example, was it remotely credible for Bernanke to proclaim that the U.S. economy couldn’t survive the failure of Citigroup, Goldman Sachs and Morgan Stanley? The nature of the question answers it. Not only was Bernanke wrong about the bailouts, he was incorrect in resounding fashion.
Silicon Valley isn’t a booming part of the United States because all of its businesses succeed, but precisely because this hive of entrepreneurialism has been marked by 50 years of constant failure. Failure is information, it tells entrepreneurs what not to do, and it ensures that failed companies like Webvan and theglobe.com are starved of capital so that upstarts like Google and Facebook can access it in order to utilize it more successfully.
Bernanke was not only wrong about the impact of bank failures, but his being incorrect created a financial crisis (without the initial bailout of Bear Stearns, Lehman dies rather quietly). Bernanke is presently being lionized by a naive commentariat for his steady hand during the falsely named “financial crisis,” but lost on these enablers of Bernanke’s monetary mysticism is that our departing Fed Chairman was the financial crisis.
Considering the banking sector that his Fed is charged with overseeing, and the health of which he asserted was necessary to maintain a growing economy, the bailouts he deemed essential robbed the financial system of what would have been a very robust recovery whereby by successful banks and businesses would have acquired the failures. John Mack, former Morgan Stanley CEO, told present Morgan Stanley CEO James Gorman last year that “Your No. 1 client is government.” That’s the result of the bailouts that Bernanke deemed necessary. The banking sector his Fed was wrongly charged with protecting has regulated them into a scenario whereby they owe their existence to the federal government.
Unemployment? Though it sat at 4.7% when Bernanke arrived at the Fed, today, despite his central bank once again being wrongly charged with keeping it low, it sits at 6.7%. Notable about today’s number is that it’s only as low as it is insofar as there’s been a massive exodus of once willing workers out of the labor force altogether.
The dollar? Though gold was at $480 when Bernanke was nominated, today a dollar buys 1,250th of an ounce. This is important when we stop to consider the nosebleed unemployment that has prevailed on Bernanke’s watch. There are no companies and no jobs without investment first, and when investors put money to work, they are once again buying future dollar income streams. Bernanke’s policies of devaluation, policies explicitly encouraged by the Bush and Obama administrations, worked powerfully against the very investment that would have made jobs plentiful, and unemployment low. Comical here for a man whom Steve Forbes correctly fingered as clueless about the nature of inflation is that despite the run on the dollar during Bernanke’s time at the Fed, he had the nerve last year to assert that he’s had a better inflation record than any chairman in Fed history!
All of which brings us to Bernanke’s adolescent policies of quantitative easing. Wouldn’t life be rather simple if economic growth were a function of creating dollars en masse? Bernanke’s policies these last five years confirm that our economy has suffered a Fed Chairman who apparently believes counterfeiting would be economically stimulative were it legal.
Back in the real world, just as apartments in New York would be very scarce if rents were set at a maximum of $100/month, so has credit been rather tight for all but governments and the largest businesses amid Bernanke’s attempts to make it cheap by Fed fiat. No surprise there. Why save if Fed policy ensures little return on one’s saving.
Bernanke did all this to blunt the pain of recession, and this act is arguably the biggest indictment of his failed tenure at the Fed. Indeed, lost on this most conceited of Fed Chairs is that recessions, painful as they are in the near term, are necessary. Recessions, far from a bad thing, signal an economy on the mend; one being cleansed of all the bad businesses, all the malinvestment in sectors like housing, and all the misuses of labor that are holding back growth. Recessions mean the economy is curing itself on the way to recovery, so in seeking to fine tune the economy out of a very healthy correction, Bernanke has robbed it of a stupendous recovery.
Readers can no doubt expect myriad bouquets to be thrown Bernanke’s way in the coming days and weeks, but they should not be fooled. The Fed at present is charged with overseeing the banking system, with keeping unemployment low, protecting the dollar, and keeping the economy on a growth path. To be fair to Bernanke, the problem, as mentioned early on, goes beyond him. We’re asking the Fed to do that which no man or collection of extraordinarily wise men could ever credibly do.
Still, if Bernanke is to be judged on the various Fed mandates that he readily accepted in taking the job of Fed Chairman, then one can only conclude that his failure will be one for the history books. The banking system is now a ward of the state, unemployment is substantially higher than it was when he arrived, the dollar has plummeted, and the Fed funds rate sits at zero. The zero rate, though a signal of the childish thinking that animates Bernanke’s policies, is an explicit self-admission from Bernanke himself about how poorly he’s handled the power wrongly given him.
Ben Bernanke’s appointment to the Fed arguably speaks to George W. Bush’s worst mistake among many made while in office; the falsely named “Affordable Care Act” the egregious error standing in the way of his re-appointment being President Obama’s greatest blunder. Readers should rejoice his departure, and thank goodness that the adolescent approach to economics which Bernanke preaches will no longer hold sway in what is a superfluous Federal Reserve, albeit one possessing the power to foist great damage on the economy as Bernanke’s years at the helm reveal in frightfully vivid color.
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