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Home Publications Blogs Beat the Press Assessing Neil Irwin's Assessment of Ben Bernanke

Assessing Neil Irwin's Assessment of Ben Bernanke

Thursday, 19 December 2013 08:11

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.


Comments (11)Add Comment
tighter or looser?, Low-rated comment [Show]
Money solves all problems ... if you can get it
written by A Greek Bearing Facts, December 19, 2013 9:31
"Btw, the idea that we risked a second Great Depression from a complete collapse is a fairy tale for the kids. We know how to get out of a depression: spend money."

It is certainly true that a different set of fiscal and monetary policies could have lifted the country out of depression without at the same time holding up the wealth of rich bankers and the owners and bond holders of big banks. As Dean correctly notes, all that those alternative policies would have required is big piles of cash.

In our system of government, however, Congress must vote to appropriate the cash (if the rescue is to come through fiscal policy) or the Board of Governors of the Fed must approve the policy -- with the tacit permission of the President and Congress -- if the rescue is to come through monetary policy. If Congress were filled with Dean Bakers or legislators with Dean's preferences we can easily imagine the fiscal policies that could have substituted for the TARP and the monetary and regulatory policies that Dean excoriates in this column.

The simple fact, however, is that Congress is NOT filled with Dean Bakers or legislators sympathetic with his views. Dean knows this. Barack Obama, Larry Summers, and all the President's economic advisors know this. So presumably does Ben Bernanke. There is not one chance in a thousand that the fiscal and monetary policies Dean recommends would have been embraced by Congress back in 2008 or 2009. To believe otherwise is "is a fairy tale for the kids." (Ask yourself this: If Dean's -- and my -- policy preferences were so popular in Congress, why was the 2009 stimulus package so small? Why wasn't the stimulus expanded in late 2009 when the scale of the economic fallout was plain to all?)

Ben Bernanke and his colleagues on the Fed had to conduct monetary policy in the constitutional and political world we live in, not in some imaginary world where a snap of Dean’s fingers could persuade Congress to appropriate the piles of cash needed to set up an alternative to the 2008 banking system. We might agree that an alternative set of policies could have kept the financial system operating while forcing big banks, their managers, their shareholders, and their creditors accept huge losses. But we should also recognize that those alternative policies would not have commanded majority support in Congress. That support was crucially needed if the alternative policies were to work. Given the constraints he faced, I think Ben Bernanke did an outstanding job leading monetary policy from 2008 onwards.
written by skeptonomist, December 19, 2013 9:42
Will history view this time as the end of The Era of Obsession with the Fed? Or will someone finally get appointed as Chairman who is able to control the economy single-handedly? For some time most people seemed to think Greenspan was that superhuman individual, but apparently history will have a different verdict on him - at least economists changed their minds radically. Bernanke pretty quickly failed to come up to the mark despite his extravagant boasts. Will Janet Yellen have the ability to control bubbles and inflation with a few well-chosen words?
Do you have a link, pete?
written by ifthethunderdontgetya™³²®©, December 19, 2013 9:42
There is a need to, as Jared said in the NY Times, "unfortunately," bring real wages down.

I'd like to see what his argument is.
Even with the ones we have, you could do better
written by Jennifer, December 19, 2013 10:35
"But we should also recognize that those alternative policies would not have commanded majority support in Congress."

TARP failed the first time. There was significant opposition at the time, from the left and the right, to what the Fed was proposing. If you've read the first-hand accounts of TARP's passage, it was by no means "supported"-it was railroaded-in on the basis that it was complicated, the Fed knew best, and it was the end of the world. If there had been some coordinated, principled, opposition-either from Congress or the executive branch, it would have been different.
It is more than reasonable to suggest that the Fed would have got whatever it wanted, if it had wanted more accountability and/or re-structuring, it would have gotten it.
house bought by investors not individuals
written by djb, December 19, 2013 10:47
any new housing bubble is probably caused by corporations buy foreclosed houses for pennies on the dolllar

and some of them are former lehman execs I read somewhere

written by Last Mover, December 19, 2013 11:55
He helped sell the TARP as an emergency no questions asked bailout.

Of course this is big commie lie. Talk radio reported banks were forced to take TARP even after rejecting it. Banks could not even return what they got, forced to keep it as an excuse for Obama to nationalize them into what they are today - commie credit unions - as everyone knows.
tired of this tired "political world we live in" repeated by a Greek
written by Cheryl, December 19, 2013 12:54
"Ben Bernanke and his colleagues on the Fed had to conduct monetary policy in the constitutional and political world we live in" - this argument is only valid if the opposition has clean hands. Since the opposition has more white collar and unreported crimes/bribes/insider trading/ etc/etc/etc than many of the spineless Dems they could have been pressured to accept Dean Baker's solutions or even removed from office if push came to shove. If they had been removed from office and the too-big-to fail allowed to collapse or told to shrink the US economy would have recovered sooner and many suicides, defaults, losses of business and homes could have been avoided. The hold of the Koch/ALEC/Tea Party/Fix the Debt/ etc/ etc on economic policy would have been weaker or non-existent, depending on how many of the people behind those operations would have gone down the tubes with their failed institutions.
written by fuller schmidt, December 19, 2013 1:52
What a great essay to be able to read. (You said "10% about" instead of "above", sir.) Greek seems to be responding to what he thinks it says not what it says.
written by pete, December 19, 2013 4:07
It was the article in November on Janet Yellen and her research, such as the famous paper with her spouse about using inflation to bring down real wages...in my mind the standard Keynesian model. So the author asked a few folks what they thought of that, including Jared, and he said "unfortunately" that the result of this model was lower real wages. Macroeconomics is about output. Getting more "Y". So pushing up P while keeping W relatively constant results in higher business profits, more workers are hired, more Y. Could have also got there the old fashioned way, waiting for workers to make concessions. But wages are sticky downward, so inflation is a way to get it to happen. This apparently is a shock to some, I think our economics education is lacking.
written by skeptonomist, December 19, 2013 8:15
Employers are not waiting for wages to come down, they are waiting for demand to come up. Nor are they waiting for interest rates to go negative, either nominal or real. In countering the arguments of conservatives about the effect of taxation or regulation, Krugman and Baker always appeal to the role of demand, but this gets forgotten when the subject is monetary policy.

Evidently Krugman and Baker think, like conservatives, that businesspeople act on the basis of Say's law - if they just hire and produce, demand will follow. Sorry, they don't act collectively, they act individually and they can't assume everyone else will do the same thing. Nothing happens if employers and investors don't see solid demand.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.