December 19, 2013
Ben Bernanke has definitely done some things right in dealing with the downturn, most importantly having the Fed act more aggressively than many other central banks in trying to boost the economy. However his record has far more blemishes than Neil Irwin notes in his ‘how history will judge‘ piece.
First of all, Ben Bernanke was less of an innocent bystander than Irwin implies. While he had been a Princeton academic before becoming Fed chair, that was not immediately before becoming Fed chair. He had been a member of the board of governors of the Federal Reserve from 2002 to 2005. In 2005 he became the head of President Bush’s Council of Economic Advisers. It was during this period that the housing bubble was growing to ever more dangerous levels, fueled by mass produced junk mortgages. The latter were being packaged in mortgage-backed securities and sold around the world. Bernanke was right there in the middle of this and apparently thought everything was just fine.
Irwin also downplays the extent to which Bernanke failed to appreciate the disaster even as it was unfolding. Bernanke apparently failed to recognize that the loss of more than $1 trillion in annual demand from the collapse of the housing bubble could not be easily replaced from other sources. He also totally missed the depths of the financial crisis.
For example, after Bear Stearns collapsed in March of 2008, he testified to Congress that he didn’t see another Bear Stearns out there. Of course there were plenty more Bear Stearns out there with names like Lehman, AIG, Fannie Mae, Freddie Mac, Goldman Sachs etc. The whole gang would have gone belly up by the end of the year were it not for massive intervention by the government. (At the time of the Bear Stearns comment, the media were too polite to note that Bernanke had not seen the last Bear Stearns.)
The claim that Bernanke could not have rescued Lehman because they lacked the legal authority is also dubious. Bernanke did many things in the crisis with questionable legal authority. Suppose that the Fed and Treasury had rescued Lehman, who would have taken them to court? This one might fool little kids and Washington Post reporters, it is not the sort of thing that adults need to take seriously.
Irwin also glosses over the basic story of the Fed/Treasury bailouts of Wall Street. The bailouts were designed to keep the Wall Street boys living high at the expense of the rest of the country. While it was desirable to prevent a full scale collapse, this could have been done by imposing strict conditions on bailout money that would have ensured the financial system would be fundamentally restructured. This would have meant telling Goldman Sachs, Morgan Stanley, and the rest that if they want to stay alive they will have to agree to become fundamentally different institutions (e.g. smaller, more narrowly focused on normal banking activities etc.). Since these banks were on their death bed, they would have little choice. (Btw, the idea that we risked a second Great Depression from a complete collapse is also a fairy tale for the kids. We know how to get out of a depression: spend money.)
Instead of trying to ensure that bailout money came with strict conditions, for example by calling Congress’ attention to the fact that he was keeping banks on life support and that Congress could impose conditions on these handouts, Bernanke did the opposite. He helped sell the TARP as an emergency no questions asked bailout. He hyped the case by warning Congress that the commercial paper market (a cash lifeline for even healthy businesses) was shutting down. He didn’t bother to mention that the Fed had the power to single-handedly keep the commercial paper market in business. He waited until the weekend after the TARP passed to announce the creation of a special lending facility for this purpose. This act of deception should feature prominently in any discussion of Bernanke’s tenure.
Bizarrely, Irwin comments on the evidence of bubble’s developing in the QE low interest rate environment:
“some markets — for farmland in middle America, emerging market bonds — have even flirted with bubble territory, helped along by Bernanke’s money printing.”
He left housing off the list for some reason. In the spring of this year house prices were roughly 10 percent about their trend levels. While this is not terribly frightening, they were rising at a double digit annual rate. Furthermore, in many markets prices were rising at 20-30 percent annual rates. There were serious grounds for concern about a new housing bubble.
Interestingly, Bernanke’s June taper talk appears to have taken the air out of this bubble. It sent mortgage interest rates up by more than a percentage point. That caused many investors to flee the market, leading to a sharp deceleration in the rate of price appreciation. This may not have been Bernanke’s intention, but it was an important and desirable outcome of the taper talk. Of course it would have been hoped by now that the Fed would be prepared to use other tools than interest rates to try to stem the growth of asset bubbles.
These are all important features of Bernanke’s tenure that readers should know. Let’s hope history does a better job than Irwin.
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