Preface and Update:
This week - and to much fanfare - Janet Yellen and Ben Bernanke testified on what they believe is the appropriate economic response to the Corona crisis. Unsurprisingly, in their testimony they both called for more stimulus from the Fed and more profligacy from Congress; basically more of exactly what got us into this mess. Implicit in soliciting their testimony is the belief that Yellen and Bernanke have valuable insights to offer. To be sure, they both served as Fed chair and exercised enormous influence over the US economy. However, having that power doesn't meant either one of them had the knowledge or wisdom to properly exercise it. (The fact that the Fed has so much power to begin with is another issue altogether).
Indeed, In June 2017, Janet Yellen claimed there wouldn't be another financial crisis in 'our lifetimes.' (1) Also in June 2017, she went on to say that the Fed reducing its balance sheet would be as exciting as 'watching paint dry.' (2) Bernanke made mistakes every bit as big as Yellen's. However, Yellen's mistakes described above were associated with predictions about the future. Mistakes of this type - and Fed officials are constant generators of them - merely point out what should be clear to most people by now; the complete and total incapacity of central bankers to understand the implications of the policies they implement.
In contrast, the mistakes of Bernanke - at least those described here - are far more telling because they give insight into the Fed as an institution and the type of people the Fed charges with leadership functions. In this discussion it will be seen how in the years before the crisis Ben Bernanke praised the financial regulatory system. He regularly singled out the strength of regulations as an important factor in the economy's recovery from the collapse of the tech bubble and the 9-11 attacks. He also claimed the increased complexity of modern finance gave consumers more choices and was an unalloyed economic good. Finally, in spite of his long-running service as a senior Fed official in the years before the 2008 crisis, Bernake never used the proverbial 'bully-pulpit' to argue for an overhaul or review of financial regulations.
However, after the financial crisis, Bernanke quickly seized on inadequate regulations as the 'true policy failing'- his words - in the years leading up to the crisis. This conclusion wasn't the result of sober introspection or self-appraisal. Instead, it was a transparently obvious attempt to deflect blame away from the institution, (the Fed), and the individuals, (Greenspan and Bernanke), who deserved it so much.
As the saying goes, 'A lie always tells a single truth; you're weak."
19 JUL 2020
Sugar Land, TX
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Amazingly - and in spite of his role as one of the chief architects of the financial crisis - Ben Bernanke's reputation soared in the aftermath of the crisis. He was lionized as a heroic figure that leapt into action when the world hung in the balance. There are huge flaws in this narrative, not the least of which is it ignores Bernanke's role in bringing the crisis about in the first place.
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.
Here he is on the Freakanomics podcast from December 03, 2015, "...the true policy failing leading up to the great crisis was on the regulatory and supervisory side." This same regulatory inadequacy is also discussed in The Courage to Act.
- On page 84 he writes, "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."
- A few pages later, 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 and the people placed in charge of it.
As mentioned previously, Ben Bernanke served on the Fed for years prior to the financial crisis. In all these years of service he 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. (3)
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." (4) 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.
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 bogus and self-serving. The contrasts also expose the enormous flaws, fissures and faults upon which today's Federal Reserve is built. That these flaws, fissures, and faults should then generate enormous economic earthquakes from time to time should surprise no one.
(1) "Fed's Yellen expects no new financial crisis in our lifetimes," Reuters, June 27, 2017
(2) "The Federal Reserve: All Hat and No Cattle," http://www.the92ers.com/blog/federal-reserve-all-hat-and-no-cattle
(3) "Deflation Making Sure it Doesn't Happen Here," Remarks by Governor Ben S. Bernanke before the National Economists Club, November 21, 2002
(4) 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