Ben Bernanke as Public Intellectual? Are You Serious?

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Dean Baker
The Prospect (UK), December 16, 2009

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Prospect’s 2009 public intellectuals list contains many crimes against good sense. It was obviously right to include Paul Krugman, Robert Shiller, Elizabeth Warren and several others on the list. Nonetheless, the judges have cleaved to the conventional wisdom, and nowhere more than when rewarding our failed central bankers. Mervyn King is bad enough, but the real villain included here is the current chairman of the US Federal Reserve, Ben Bernanke.

Anyone who really understood our current financial crisis couldn’t include him. I view the economic situation as first and foremost a collapse of a housing bubble, with the financial aspects being very much secondary. Today, America is sitting on around 10 per cent unemployment, mostly because we lost $500bn in annual demand in residential construction, and then another $500bn in annual consumption as a result of a drop in consumption, driven by the lost $6 trillion in housing wealth.

Throw in the collapse of a non-residential real estate bubble (another $200 bn) and you have a $1.2bn decline in annual demand in an economy that is a bit larger than $14 trillion. Prospect’s judging panel claim that the only thing that mattered intellectually in 2009 was financial reform—figuring out “what to do next.” But wait. None of this economic loss has anything to do with the financial crisis. So how can that be true?

Nothing in the Federal Reserve’s bag of tricks can replace this lost demand—or at least not quickly. Bernanke failed to see the bubble in the first place. He felt that the Fed should not concern itself with asset bubbles, or call the attention of financial markets or the public to these bubbles by using its regulatory power to rein in lending, or explicitly using interest rates to target a bubble. His view was that bubbles come and go without having important effects on the economy. This is what puts him high on my list of villains, and should certainly knock him off anyone’s list of heroes.

It gets worse however. In so far as it does matter, I am not thrilled with his conduct in dealing with the financial crisis itself. Undoubtedly, it was right to flood the markets with liquidity—the downturn would have been much worse if it was accompanied by a full-scale financial collapse. But could we not have extracted something from the banks instead of just giving them free money? For example, restrictions on bonuses and proprietary trading. In the midst of the crisis, Goldman Sachs and Morgan Stanley were allowed to become bank holding companies, giving them the full protection of the Federal Reserve Board and the Federal Deposit Insurance Corporation, but without any requirement that they change their mode of business and stop acting like hedge funds. Las Vegas gamblers should be so fortunate.

Bernanke also deliberately misled Congress in order to help push Bush’s bailout through, known as the Troubled Asset Relief Program, or TARP. Specifically, he told Congress that the commercial paper market—meaning the market in short-term debt which companies sell to meet their payroll and bills—was shutting down. This, in my view, was the most pressing reason to move quickly on the TARP when the world was in a panic back in 2008. But what he didn’t tell Congress was that the Fed already had the power to single-handedly maintain the commercial paper market. The weekend after the TARP was approved, he announced the creation of a special facility to buy commercial paper. It was deeply dishonest.

I didn’t know at the time that the Fed had this authority, and I doubt many members of Congress did either. Crucially, it is just not the chairman of Fed’s job to misled Congress in order to push policies he likes—a big strike against Bernanke in my book. If Congress had had more time to debate the TARP, then perhaps they would have put in place conditions which prevented the banks and their executives from getting rich while the rest of the country was still in the middle of a serious recession.

Failing to act on the bubble, and thereby giving us the worst downturn in 70 years, should be sufficient to disqualify Bernanke from any list of public intellectuals. Add to this his failure to place conditions on the life support loans to the banks and misleading Congress on a hugely important issue, and you have a figure who is definitely on the wrong list for this crisis.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.