One of the best scenes in a movie, "Jaws," full of them is the confrontation between the salty Captain Quint, played by Robert Shaw and the PhD oceanographer, Matt Hooper, played by Richard Dreyfuss. The exchange is prompted by a fish - which Hooper had earlier and erroneously dismissed as a 'gaming fish' and not the killer great white shark they were after - biting through a steel piano wire leader. (1)
Quint: "Gaming fish, ay? Marlin? Stingray? Bite through this piano wire. Don't you tell me my business again."
Hooper: "Quint, that doesn't prove a damn thing."
Quint: "Well, it proves one thing Mr. Hooper. It proves you wealthy college boys don't have the education enough to admit when you're wrong."
The unwillingness of Matt Hooper in "Jaws" to admit an obvious mistake is completely mirrored by the unwillingness of the economic establishment to admit to its many mistakes in the years leading up to the 2008 financial crisis. Nowhere is this unwillingness more obvious than with members of the Federal Reserve's Open Market Committee (FOMC). In particular, the two FOMC chairmen from this era - Alan Greenspan and Ben Bernanke - have yet to admit to getting much of anything wrong in the years leading up to the crisis. In this blog post we will briefly examine two aspects of all the many things Ben Bernanke got wrong about the crisis;
- Ignorance of the enormous bubble in housing that was fueled by Fed policy
- The transparently bogus explanation Bernanke gave as the root cause of the crisis (financial regulations)
Ignorance of the Bubble
From 2002-2005 Bernanke served on the Fed's Open Market Committee (FOMC). Along with Alan Greenspan, he spearheaded the slashing of interest rates to obscenely low levels in the wake of another Fed fueled bubble - in tech stocks - collapsing. These low interest rates - which hovered at 1% for years on end - then worked in concert with the rampant economic idiocy of the Clinton administration's central plan to increase homeownership, to send home prices soaring. After serving as President Bush's chief economic advisor - where he publicly dismissed the notion of a housing bubble as a "pretty unlikely possibility" - Bernanke then served as Fed chairman from 2006-2014. A review of Fed meeting minutes from 2006 clearly show that Ben Bernanke and the Fed were completely ignorant of the enormous housing bubble which was even then starting to deflate.
Bernanke chaired his first Fed meeting on March 27-28, 2006. Here he set the template for the economic establishment's colossal ignorance of the housing bubble, and the risk this bubble posed to credit markets. Bernanke stated, "I agree with most of the commentary that the strong fundamentals support a relatively soft landing in housing." During the next Fed meeting in May, Bernanke's understanding didn't get any better and he stated, "So far we are seeing, at worse, an orderly decline in the housing market." Finally during the Fed's September meeting Bernanke concluded, "But I agree that the economy, except for housing and autos, is still pretty strong, and we do not yet see any significant spillover from housing."
As bad as Bernanke's observations during the crisis make him look in the aftermath of the crisis, an even more damming indictment of Bernanke's status as an economist - and as a human being for that matter - can be obtained by contrasting the irreconcilable opinions on regulations he held during and after the crisis. After the crisis - and while on his triumphant book tour - Bernanke repeatedly claimed that inadequate regulation was the key cause of the crisis.
- Freakanomics podcast from December 03, 2015, "...the true policy failing leading up to the great crisis was on the regulatory and supervisory side."
- In his post-crisis memoir, The Courage to Act, Bernanke writes on page 84, "The American financial system had become increasingly complex and opaque, the financial regulatory system had become obsolete and dangerously fragmented, and an excessive reliance on debt - particularly short term debt - had rendered the system unstable under pressure."
- Also in The Courage to Act, on page 94, he elaborates on the specific problems with the financial regulatory architecture, "The US financial regulatory system before the financial crisis was highly fragmented and full of gaps. Important parts of the financial system were inadequately overseen (if overseen at all) and critically, no agency had responsibility for the system as a whole." (See Ben S. Bernanke, The Courage to Act, W.W. Norton and Company, NY, 2015)
These statements make it clear Bernanke fingers inadequate regulations as the chief cause of the crisis. Not coincidentally, this conclusion gets him and his Fed colleagues off the proverbial hook for what were clearly disastrous interest rate policies. Even if the self-serving nature of this conclusion is ignored, it can easily be shown that this conclusion still demonstrates the fully fraudulent nature of today's Federal Reserve, the people placed in charge of it and the obvious shortcomings of the education these people received.
In all his years of service on the FOMC Bernanke did not raise any concerns about the structure of financial regulations. In fact, he cited a "well-regulated" banking system as one of the principal reasons the economy managed the tech bubble collapse so well! Here he is on November 21, 2002 in one of his first speeches as a Fed governor, " ...Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. (2)
Similarly, in the years leading up to the crisis, the "increasingly complex and opaque" financial system wasn't a problem, but a development to be celebrated! Here is Bernanke on May 18, 2006 at a conference organized by the Chicago Fed, "Borrowers have more choices and greater access to credit: lenders and investors are better able to measure and manage risk; and because of the dispersion of financial risks to those more willing and able to bear them, the economy and the financial system are more resilient." (3) In a final bit of irony, Countrywide's chief risk officer, John P. McMurray spoke at this same conference and presciently warned about the risks associated with the increasingly lax lending standards then being implemented to meet the diktats of (Commissar) Bill Clinton's central plan for housing.
Bernanke's many blunders in the years leading up to the crisis are less important than Bernanke's failure to admit to any real mistakes during his long (and error-riddled) FOMC career. It is no coincidence that Bernanke seized on 'regulations' as the chief cause of the crisis. Regulations are largely the responsibility of other organizations and administrative bodies. If an inadequate regulatory framework was the chief cause of the crisis, then that is someone else's failing, not the Fed's. However, and as the contrasts between his pre- and post-crisis opinions on financial regulations make clear, Ben Bernanke's conclusion that inadequate regulation played the key role in causing the crisis is both self-serving and inconsistent with his pre-2008 position on financial regulation. As this self-serving and contradictory explanation for the financial crisis makes clear, a major gap in the education provided at so-called 'elite' schools like Harvard and MIT to the financial and political elite of this country is their graduates don't "have the education enough to admit when they're wrong." Exhibit A of this defect is Ben Bernanke.
Sugar Land, TX
February 23, 2020
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2. "Deflation Making Sure it Doesn't Happen Here," Remarks by Governor Ben S. Bernanke before the National Economists Club, November 21, 2002
3. Stephen Eder, "Countrywide Exec Warned on Loans at '06 Fed Meeting," Reuters, June 09, 2009 https://www.reuters.com/article/countrywide-mcmurray/countrywide-exec-warned-on-loans-at-fed-06-meeting-idUSN0940037620090609