In “Bernanke Admits He’s Clueless On Economy’s Soft Patch”, Forbes blogger Agustino Fontevecchia notes:
Brutally honest, Bernanke admitted that he had no clue what was actually causing the current fragility in the U.S. economic recovery. While the FOMC statement assigned blame outside of the U.S., pointing at Japan along with rising food and oil prices, Bernanke was put on the spot by a reporter who noted the inconsistency behind that explanation and a lowering of long term forecasts. Bernanke took the hit, admitting only some of the factors were temporary and that he didn’t know exactly what was causing the slowdown, but that it would persist. “Growth,” said Bernanke, “will return into 2012.”
Specifically, Bernanke said today:
We don’t have a precise read on why this slower pace of growth is persisting.
Well, it is obvious to anyone who has been paying attention what’s causing the slow down, and if Mr. Bernanke doesn’t know, he should be fired.
As I’ve repeatedly explained since 2008, all independent economists and financial experts know why the economy is weak … and everything the Fed has been doing has been weakening it.
High-Level Fed Officials Slam Bernanke
Fed Vice Chairman Donald Kohn conceded that the government’s actions “will reduce [companies’] incentive to be careful in the future.” In other words, he’s admitting that the government’s actions will encourage financial companies to make even riskier gambles in the future.
Kansas City Fed President and veteran Fed official Thomas Hoenig said:
Too big has failed….
The sequence of [the government’s] actions, unfortunately, has added to market uncertainty. Investors are understandably watching to see which institutions will receive public money and survive as wards of the state…
Any financial crisis leaves a stream of losses among the various participants, and these losses must ultimately be borne by someone. To start the resolution process, management responsible for the problems must be replaced and the losses identified and taken. Until these actions are taken, there is little chance to restore market confidence and get credit markets flowing. It is not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery….
Many of the [government’s current policy revolves around the idea of] “too big to fail” …. History, however, may show us a different experience. When examining previous financial crises, both in other countries as well as the United States, large institutions have been allowed to fail. Banking authorities have been successful in placing new and more responsible managers and directions in charge and then reprivatizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been larger…
The current head of the Philadelphia fed bank, Charles Plosser, disagrees with Bernanke’s strategy of the endless printing-press and ever-increasing fed balance sheet:
Plosser urged the Fed to “proceed with caution” with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.***Bernanke argued that focusing on the size of the balance sheet misses the point, arguing the Fed’s various asset purchase programs are not easily summarized in a single number.
But Plosser said that the growth of the Fed’s balance sheet was a key metric.“It is not appropriate to ignore quantitative metrics in this new policy environment,” Plosser said…Plosser is bringing the spotlight right back to the Fed’s balance sheet.“The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions,” Plosser said.
The former head of the Fed’s Open Market Operations says the bailout might make things worse. Specifically, the former head of the Fed’s open market operation – the key Fed agency which has been loaning hundreds of billions of dollars to Wall Street companies and banks – was quoted in Bloomberg as saying:
“Every time you tinker with this delicate system even small changes can create big ripples,” said Dino Kos, former head of the New York Fed’s open-market operations . . . “This is the impossible situation they are in. The risks are that the government’s $700 billion purchase of assets disturbs markets even more.”
And William Poole, who recently left his post as president of the St. Louis Fed, is essentially calling Bernanke a communist:
Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said.The current situation at the Fed seems eerily similar, he said.“What is discipline – where are the hard choices – when does Fed say our resources are exhausted?” Poole asked.
But the strongest criticism may be from the former Vice President of Dallas Federal Reserve, who said that the failure of the government to provide more information about the bailout could signal corruption. As ABC writes:
Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.
“Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here,” he said.
Of course, former Fed chairman Paul Volcker has also strongly criticized current Fed policies.
Global Agencies Slam Bernanke
The Bank of International Settlements (BIS) – called “the central banks’ central bank” – has slammed the Fed for blowing bubbles and then “using gimmicks and palliatives” which “will only make things worse”.
As the Telegraph wrote in June 2007:
The Bank for International Settlements, the world’s most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood…
The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system…
The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances …
“Sooner or later the credit cycle will turn and default rates will begin to rise,” said the bank.
A year later, in June 2008, the Telegraph wrote:
A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. This has proved frighteningly accurate…
[BIS economist] Dr White says the US sub-prime crisis was the “trigger”, not the cause of the disaster.
Indeed, BIS slammed the Fed and other central banks for blowing the bubble, failing to regulate the shadow banking system, and then using gimmicks which will only make things worse. As the 2008 Telegraph article notes:
In a pointed attack on the US Federal Reserve, it said central banks would not find it easy to “clean up” once property bubbles have burst…
Nor does it exonerate the watchdogs. “How could such a huge shadow banking system emerge without provoking clear statements of official concern?”
“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low,” he said.
The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning…
“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.
In other words, BIS slammed the easy credit policy of the Fed and other central banks, and the failure to regulate the shadow banking system.
More dramatically, BIS slammed “the use of gimmicks and palliatives”, and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”.
But Bernanke and the other central bankers (as well as Treasury and the Council of Economic Advisors and Barney Frank and Chris Dodd and the others in control of American and British and French and Japanese and German and virtually every other country’s economic policy) ignored BIS’ advice in 2007 and 2008, and they are still ignoring it today.
Instead, they are doing everything they can to (2) prop up asset prices by trying to blow a new bubble by giving banks trillions, (2) re-write accounting and reporting rules to let the big banks and other giants keep bad debts on their books (or in sivs or other “second sets of books”) and to hide the fact that they are bad debts, and (3) encourage consumers to spend spend spend!
“The world’s most prestigious financial body”, “the ultimate bank of central bankers” has condemned Bernanke and all of the other G-8 central banks, and stripped bare their false claims that the crash wasn’t their fault or that they are now doing the right thing to turn the economy around.
As Spiegel wrote in July 2009:
White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market…
As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the “villain” in the global economy…
In the restrained world of central bankers, it would have been difficult for White to express himself more clearly…
It was probably the biggest failure of the world’s central bankers since the founding of the BIS in 1930. They knew everything and did nothing. Their gigantic machinery of analysis kept spitting out new scenarios of doom, but they might as well have been transmitted directly into space…
In their report, the BIS experts derisively described the techniques of rating agencies like Moody’s and Standard & Poor’s as “relatively crude” and noted that “some caution is in order in relation to the reliability of the results.”…
In January 2005, the BIS’s Committee on the Global Financial System sounded the alarm once again, noting that the risks associated with structured financial products were not being “fully appreciated by market participants.” Extreme market events, the experts argued, could “have unanticipated systemic consequences.”
They also cautioned against putting too much faith in the rating agencies, which suffered from a fatal flaw. Because the rating agencies were being paid by the companies they rated, the committee argued, there was a risk that they might rate some companies too highly and be reluctant to lower the ratings of others that should have been downgraded.
These comments show that the central bankers knew exactly what was going on, a full two-and-a-half years before the big bang. All the ingredients of the looming disaster had been neatly laid out on the table in front of them: defective rating agencies, loans repackaged to the point of being unrecognizable, dubious practices of American mortgage lenders, the risks of low-interest policies. But no action was taken. Meanwhile, the Fed continued to raise interest rates in nothing more than tiny increments…
The Fed chairman was not even impressed by a letter the Mortgage Insurance Companies of America (MICA), a trade association of US mortgage providers, sent to the Fed on Sept. 23, 2005. In the letter, MICA warned that it was “very concerned” about some of the risky lending practices being applied in the US real estate market. The experts even speculated that the Fed might be operating on the basis of incorrect data. Despite a sharp increase in mortgages being approved for low-income borrowers, most banks were reporting to the Fed that they had not lowered their lending standards. According to a study MICA cited entitled “This Powder Keg Is Going to Blow,” there was no secondary market for these “nuclear mortgages.”…
William White and his Basel team were dumbstruck. The central bankers were simply ignoring their warnings. Didn’t they understand what they were being told? Or was it that they simply didn’t want to understand?
The head of the World Bank also says:
Central banks [including the Fed] failed to address risks building in the new economy. They seemingly mastered product price inflation in the 1980s, but most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the ‘real economy’ of jobs, production, savings, and consumption could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong.
A study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent hurts the economy:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
***
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
By failing to break up the giant banks, governments are forced to take counter-productive emergency measures (see this and this) to try to cover up their insolvency. Those measures drain the life blood out of the real economy … destroying national economies.
Indeed, instead of directly helping the American people, the government threw trillions at the giant banks (including foreign banks; and see this) . The big banks have – in turn – used a lot of that money to speculate in commodities, including food and other items which are now driving up the price of consumer necessities [as well as stocks]. Instead of using the money to hire Americans, they’re hiring abroad (and getting tax refunds from the government).
Economists Slam Bernanke
Stephen Roach (former chief economist for Morgan Stanley, and now director of Morgan Stanley Asia) is one of the most influential and respected American economists. Roach told Charlie Rose recently that we have had terrible Federal Reserve policy for the past 12 years under Greenspan and Bernanke, that they concocted hair-brained theories (for example, that we should let the boom and bust cycle occur, but then “clean up the mess” once things fall apart), and that we really need to reform the Fed.
Specifically, here’s the must-read portion of the interview:
STEPHEN ROACH: And what’s missing in the debate that drives me nuts is going back to the very function of central banking that’s at the core of our financial system. Do we have the right model for the Fed to go forward? And, you know, I think we’ve minimized the role that the custodians, the stewards of our financial
system, the Federal Reserve, played in leading to this crisis and in making sure that we will never have this again. I think we’ve had horrible central banking in the United States for the past dozen of years. I mean, we elevate our central bankers, we probably .CHARLIE ROSE: From Greenspan to Bernanke.
STEPHEN ROACH: Yeah.
CHARLIE ROSE: Both.
STEPHEN ROACH: We call them maestro, and, you know, we make them
sound larger than life. And, you know, and the fact is, they condoned
policies that took us from one bubble to another. They failed to live up
to their regulatory responsibility granted them by law. They concocted new
theories to explain why these things could go on forever, and they harbored
the belief, mistakenly in my view, that monetary policy is too big and
blunt an instrument, and so you just bring it in to clean up the mess
afterwards rather than prevent a mess ahead of time. Well, look at the
mess we’re in right now. We need a different approach here. We really do.
Leading economist Anna Schwartz, co-author of the leading book on the Great Depression with Milton Friedman, told the Wall Street journal that the Fed’s entire strategy in dealing with the financial crisis is wrong. Specifically, the Fed is treating it as a liquidity problem, when it is really an insolvency crisis.
Moreover, prominent Wall Street economist Henry Kaufman says that the Federal Reserve is primarily to blame for the financial crisis:
“I am convinced that the misbehavior of some would have been much rarer — and far less damaging to our economy — if the Federal Reserve and, to a lesser extent, other supervisory authorities, had measured up to their responsibilities …
Kaufman directly criticized former Federal Reserve Chairman Alan Greenspan for not using his position to dissuade big banks and others from taking big risks.
“Alan Greenspan spoke about irrational exuberance only as a theoretical concept, not as a warning to the market to curb excessive behavior,” Kaufman said. “It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective.”
Partly because the Fed did not strongly oppose the repeal in 1999 of the Depression-era Glass-Steagall Act, more large financial conglomerates that were “too big to fail” have formed, Kaufman said, citing a factor that has made the global credit crisis especially acute.
“Financial conglomerates have become more and more opaque, especially about their massive off-balance-sheet activities,” he said. “The Fed failed to rein in the problem.”…
“Much of the recent extreme financial behavior is rooted in faulty monetary policies,” he said. “Poor policies encourage excessive risk taking.”
Economist Marc Faber says that central bankers are money printers who create bubbles, and that the system would be much better now if the Fed hadn’t intervened. Specifically, Faber says that – if the Fed hadn’t intervened – the system would be cleaned out, the system would be healthier because debt load and burden on taxpayers would be reduced.
Economist Jane D’Arista has shown that the Fed has failed miserably at its main task: providing a “counter-cyclical” influence (that is, taking the punch bowl away before the party gets too wild).
The Fed has also failed miserably in its role as regulator of banks and their affiliates. As well-known economist James Galbraith says:
The Federal Reserve has never been an effective regulator for the straightforward reason that it is dominated by economists and bankers and not by dedicated skeptics who make bank regulation a full-time profession.
Unemployment
The Federal Reserve is mandated by law to maximize employment. The relevant statute states:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
But the Fed has apparently decided to fight inflation instead of unemployment.
No wonder we’re suffering depression-level unemployment.
Leverage
The Fed says that we should reduce leverage, but is doing everything in its power to increase leverage.
Specifically, the New York Federal published a report in 2009 entitled “The Shadow Banking System: Implications for Financial Regulation”.
One of the main conclusions of the report is that leverage undermines financial stability:
Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.
And as a former economist at the New York Fed, Richard Alford, wrote recently:
On Friday, William Dudley, President of FRBNY, gave an excellent presentation on the financial crisis. The speech was a logically-structured, tightly-reasoned, and succinct retrospective of the crisis. It took one step back from the details and proved a very useful financial sector-wide perspective. The speech should be read by everyone with an interest in the crisis. It highlights the often overlooked role of leverage and maturity mismatches even as its stated purpose was examining the role of liquidity.
While most analysts attributed the crisis to either specific instruments, or elements of the de-regulation, or policy action, Dudley correctly identified the causes of the crisis as the excessive use of leverage and maturity mismatches embedded in financial activities carried out off the balance sheets of the traditional banking system. The body of the speech opens with: “..this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years.”
In fact, every independent economist has said that too much leverage was one of the main causes of the current economic crisis.
Federal Reserve Bank of San Francisco President Janet Yellen said recently that it’s “far from clear” whether the Fed should use interest rates to stem a surge in financial leverage, and urged further research into the issue.“Higher rates than called for based on purely macroeconomic conditions may help forestall a potentially damaging buildup of leverage and an asset-price boom”.
And yet, the Fed has been and continues to be one the biggest enablers for increased leverage. As anyone who has looked at Mr. Bernanke and Geithner’s actions will tell you, many of the government’s programs are aimed at trying to re-start securitization and the “shadow banking system”, and to prop up asset prices for highly-leveraged financial products.
Indeed, Mr. Bernanke said in February 2009:
In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-Backed Securities Loan Facility (TALF).
And he said it again in September 2009:
The Term Asset-Backed Securities Loan Facility, or TALF … has helped restart the securitization markets for various types of consumer and small business credit. Securitization markets are an important source of credit, and their virtual shutdown during the crisis has reduced credit availability for many borrowers.
As I noted in 2009, the economy is not getting better because government’s policies are strengthening the parasite and killing the patient.
Fraud
Two fundamental causes of the Great Depression, and of our current economic problems, are fraud and inequality.
Fraud was one of the main causes of the Great Depression and of our current economic problems, but the Federal Reserve has done nothing to rein in fraud today.
Indeed, despite the Fed’s responsibility to prevent certain types of fraud, it adopted a “see no evil” policy and winked at it. (Bernanke’s predecessor as Fed chair, Alan Greenspan, adopted the non-sensical position that fraud could never happen, so the Fed shouldn’t police for it).
The New York Federal Reserve Bank – then run by current Treasury Secretary Tim Geithner – also helped to cover up fraud. As senior S&L prosecutor and professor of economics and law William Black points out:
Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth.
Inequality
Inequality was another major cause of the 1930s Depression and today’s lousy economy, but the Fed has done nothing to even things out. Indeed, inequality is currently worse than during the Depression.
Indeed, the Fed has given trillions to the biggest banks, and virtually nothing to main street. This has gone to Wall Street bonuses and made the big banks’ executives richer, but the rest of us poorer (and it hasn’t help the economy).
Bottom Line
The reason for the weak economy is obvious to anyone paying attention.
If Bernanke can’t see it – or won’t admit – he should be fired.
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Thanks Yves for a good summary of the mess we are in.
Of course keeping Bernanke in his post may be just the thing that unseats Pres. Obummer. One can only hope.
This is George Washington’s post. but glad you like it.
Oops, Sorry. Thank you GW.
The description of a problem is not an explanation of its causes. Most of the causes presented in the article are of a moralistic religious nature. The system is not in trouble, the system is as it should be given the historical premises of its development. That the shape of the system at this moment is unpleasant for us does not mean that the system is irrational. The premises upon which it is built may be irrational, but how can they be irrational if they are? Everything rational is real, though it may be unpleasant.
At bottom the seed is the anguish of each one of us for persisting for lasting for living.
We call the maneuvers we undertake for our persistence in the future profit. We all want to accumulate and that accumulation eventually proves empty because the existence of each one of us depends on the existence of everyone else. We act as if we were free unanchored individuals and therein is the the explanation of the “crisis”. I don’t know that there is any alternative to the system. Revolutions and wars by eliminating some human relations revitalize the set of those relations. Perhaps that is next.
One thing is for sure, Perpetual Growth is not the cure to the problems generated by Perpetual Growth.
I’ve found repeatedly that when people say something like, “There is no other way!”, what they mean is, “I cannot imagine any other way.” When alternatives are presented they are rejected for not being sufficiently like The System they are to replace. Alternatives which are truly different are rejected because they cannot be imagined. It’s a cultural problem.
The article “”Growing Your Way Out of Debt” Is a Fantasy”, linked to in today’s links (http://www.oftwominds.com/blogjune11/growth-fantasy6-11.html) is a good list of logical explanations as to how usury, which is the underlying driver of economic growth, serves to vacuum up profits to the finance sector at growing expense to the real economy, a process which, in time (multiple decades), eventually blocks the economy from doing the very thing usury demands; grow. Sadly, the article does not mention the absurdity of a systemic insistence on perpetual growth on a finite planet, but is a good start at least.
Herman Daly has some valuable things to say about society’s growth mania:
First a preliminary point. The verb “to grow” has become so overladen with positive value connotations that we have forgotten its first literal dictionary denotation, namely, “to spring up and develop to maturity.” Thus the very notion of growth includes some concept of maturity or sufficiency, beyond which point physical accumulation gives way to physical maintenance; that is, growth gives way to a steady state. It is important to remember that “growth” is not synonymous with “betterment.”
And:
Environmental degradation is an iatrogenic disease induced by the economic physicians who attempt to treat the basic sickness of unlimited wants by prescribing unlimited production. We do not cure a treatment-induced disease by increasing the treatment dosage! Yet members of the hair-of-the-dog-that-bit-you school, who reason that it is impossible to have too much of a good thing, can hardly cope with such subtleties. If an overdose of medicine is making us sick, we need an emetic, not more of the medicine. Physician, heal thyself.
What would steady state growth economics look like? Very different to today’s, that’s for sure. So different that describing it causes people to reject it for being too different. It’s a cultural problem.
I strongly disagree with the content of this article.
In short: it seems obvious that the cause for recession is an excess of leverage (AKA financial capital) with respect to the total amount of wages, since:
financial capital requires interest to be paid, interest requires “main street profits”. Main street profits, in turn, require someone to sell consumption goods to.
There are two possible ways to rebalance the two factors:
a) Through inflation in wages via inflationist policies;
b) Through a decrease in financial capital via bankrutptcies.
The two approaces are almost opposites, and the approach (b) is extremely painful to average workers, since it leads to deflation and depression. Also, the approach (b) is by no means a sure approach, it is not obvious that there would be a “bottom” where financial capital shrinks more than wages, there coul well be a continuing downward spiral.
While the FED and governments in general are culpable because they don’t take approach (a), your article and the people you quote would suggest the route (b), that is, in my opinion, the worse possible scenario (and in reality the prosecution of actual policies).
This harrangue is riddled with inconsistency, and completely lacking in any practical policy suggestions.
Are we still facing a “credit crisis”? Obviously the credit bubble and its collapse caused an initial credit crisis and wiped out a massive amount of corporate and household wealth. But are our current problems now due the lack of easily available credit or attractive interest rates? Aren’t they rather due to the fact that our unemployed, underemployed, underwater, over-leveraged and impoverished citizenry can no longer provide anything close to the consumption demand it once did? This notion that businesses are not investing in new equipment and new jobs because credit is still frozen is ludicrous. They are not investing in expanded production because they can’t make any money from expanded production; and they can’t make any money from expanded production because they have run out of customers with discretionary income to spend. Is GW writing about 2007, 2008, 2009 or 2011?
GW points briefly to the problem of unemployment, and suggests that the Fed should do something about it, in line with its mandate. He also points to inequality and suggests that someone should do something about that too. What exactly should be done? What policies would GW support that are in line with the attitudes of the austerity-mongering, libertarian, liquidationist, conservative economists he cites so approvingly? Specifically on the first point, what monetary policies can the Fed employ to hit a full employment “target” that do not involve an easy money expansion of precisely the sort GW decries? Beyond that, the faith-based belief that the Fed can control how many people are or are not employed in our society, and hit an unemployment “target” is a symptom of the same exaggerated estimates of the powers of Fed maestros that GW decries. It it an attitude characteristic of the same blinkered monetarism that has provided an ongoing excuse for decades for neglecting fiscal policy. The actions of Fed, like other financial institutions has some influence over employment. But the Fed cannot control the unemployment rate
The piece is a mess. In his zeal to make the Fed the root of all evil, the author can’t seem to decide whether he favors austere Mellonite liquidation or Rooseveltian activism.
Forgot to add an end tag for my italics. Hope this works.
Sorry about that.
This is a good summary — and I appreciate the work that’s put into it. But I have to say, the references are a bit all over the place.
To make some rather massive generalisations:
(1) The Fed officials are probably right-wing semi-cranks — Inflation Warriors who want to push Bernanke down the Herbert Hoover path and cause a depression. (Hence the Soviet Union references and the like. The idea is that the private sector needs to get the government monkey off their back and they’ll solve everything. This is what the Cameron government is doing — and wrecking the British economy in the process).
Oh, and one if the critics is card carrying in this regard:
“Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank…”
The Cato Institute are beyond wacky — and their economists are terrible. Literally, they describe the economic system as it was in the 19th century.
(2) Then there’s the official institutions, like the BIS. These criticisms are real ‘rats off a sinking ship’ sort of stuff. The BIS was not trying to prevent bubbles inflating back in the day and unless they want to explicitly name an alternative policy for Bernanke to follow they’re just whining (and they know exactly what they’re doing in this regard).
(3) The economists. Stephen Roach says that a new policy is needed. Well, he’s an economist. Why doesn’t he make the proposal on the Charlie Rose show (not the worst place to get elite attention)? Why not? Because the only reason he’s making the criticism is so that he can go to dinner parties and say, “Oh, yes… Bernanke… he’s soooo wrong. We need an alternative approach.” Hot air.
As for Schwarz. No. Just no. Schwarz is a key player in bringing into existence the paradigm that caused the bubble. She has no right to chime in on this debate. She is ten times more discredited than Bernanke.
(4) The Fed themselves. You rightly point out that their policies are internally contradictory. Well, watching certain folks — like Bernanke and Geithner — for the past while, it appears obvious to me what’s going on.
They know what needs to be done. Geithner calls for fiscal stimulus and regulation. Bernanke is thinking the same thing. So, this must be a case of political paralysis. People on here will say that I’m defending these guys. I am and I’m not. If I were in their position I’d go on a political suicide bomb and just start making the calls myself. That would kill my career, but it might make a difference. So, I’d be critical of their blatant careerism here, but I can understand their reasoning. And surely it should be obvious at this stage. So, it’s less than I’m defending these men as people — I’m more so trying to point out that the problem is more substantial.
The more the criticisms build. And the more it looks like Bernanke will eventually be thrown out and replaced with some Andrew Mellon-style loon at the behest of the extremists who have been sucking up peripheral Fed positions for years, the more a certain phrase rings in my ears:
“Battle not with monsters, lest ye become a monster, and if you gaze into the abyss, the abyss gazes also into you.” — Friedrich Nietzsche
Actually that’s unfair. Sorry, I was in rant-mode. The BIS did actually call the bubble inflating. But as far as I know they have never offered a realistic counter-model to one based on private debt.
God knows it would be useful now.
Still the substance of the above criticism still stands.
Yes, Geithner is beating the table calling for regulation.
Actually, taxcheatgeithner explicitly stated he was “not a regulator”, when as head of FRBNY he was explicitly one.
What several of you fail to realize is that the trillions in losses have ALREADY occured, and the Depression is HERE right now. The only matter to be settled is who pays the price.
Another economist, Steve Keen, had a rather good takedown of Bernanke over two years ago.
http://www.debtdeflation.com/blogs/2009/01/11/bernanke-an-expert-on-the-great-depression/
Great stuff. Most of my friends and family don’t believe me when I say that many economists — in their theories — don’t worry about people not paying back their debt or not being able to pay back their debt.
From a commonsense point-of-view they’re right not believe me. Pity I’m actually probably right.
Is debt the ultimate bet…eh.
Extrapolate 9 billion-ish humans and growing from bum / homeless / desuetude (majority of pop), wage slaves, middle class, hundreds of billionaires, [???] trillionairs. Attach owed (expected) restitution of extended debt (futures promise w/interest) in increasing values to increasing smaller entities, churned in an increasingly complex computational algo driven market place all taking place in a finite organic system overlaid on a tectonic landscape, with in a human observation matrix….hit enter.
Trillionairs are the galactic center black holes with billionaires representing your smaller but widely distributed black holes.
Next take economics behind the wood shed and and end its suffering, before it ends you and every other living thing.
Skippy…Deep Field:
http://www.youtube.com/watch?v=oAVjF_7ensg
The real problem is what happens when TBTF becomes Too Big Too Save? The United States of Iceland?
The financial crisis WILL CONTINUE until TBTF IS ENDED, the only question is will the United States survive it or will we end up like Argentina in 2001 or God help us Zimbabwe.