11.30.2009 0

Bernanke Should Not Get a Pat on the Head

  • On: 12/04/2009 09:34:28
  • In: Monetary Policy
  • By Robert Romano

    Yesterday, Federal Reserve Chairman Ben Bernanke began his confirmation hearings for a second term as the nation’s central bank head. The opportunity has now presented itself for Bernanke’s supporters to evaluate its monetary policy with a hindsight view of the financial crisis of 2007 and 2008 to see how well he responded in light of what was touted as the worst crisis since the Great Depression.

    During the course of that crisis, the housing bubble popped, government-sponsored mortgage giants Fannie Mae and Freddie Mac went bankrupt and were nationalized, an oil and commodities bubble inflated and popped, markets crashed, retirement savings were wiped out, and untold trillions of dollars were pledged by Congress, the Treasury, and the Fed to bail out the system.

    According to Bloomberg News, the Fed was the top profligate, pledging as much as $7.76 trillion through various facilities to be tapped as “necessary,” including $1.6 trillion for Government-Sponsored Enterprises debt and mortgage-backed securities, some $300 billion in monetizing the debt (i.e. purchasing U.S. treasuries), and $900 billion for the Term Asset-backed Securities Loan Facility (TALF).

    The monetary base—the nation’s supply of dollars—has been more than doubled by the Fed since the crisis began. The federal funds interest rate sits at practically zero percent. In short, the money spigots have been turned all the way on, and says Bernanke, they will remain so for some time to come.

    For these and other actions in the wake of the monetary miasma—which have put taxpayers on the hook for potential staggering losses should they fail—Bernanke’s partisans argue that he should be reappointed.

    Writing for the Washington Post, Steven Rattner states that Bernanke should be thanked and, presumably (although he remarkably makes no statement on the matter), reappointed. Wrote Rattner, “Bernanke, Paulson and Geithner were truly the Committee That Saved the World. They should be thanked, not trashed.”

    Whether the massive bailout programs that were undertaken in 2008 and this year were a mistake or not requires deeper analysis, however, than the anecdotal proof that the world has not ended. Correlation, after all, is not causation, and the American people need assurance that the types of failures that caused the crisis will not occur again under Bernanke’s or anybody else’s watch.

    For the purposes of this piece, the necessity and utility of the bailouts is a debate this piece will leave aside, except to say that with gold sitting well above $1,200 an ounce, the dollar sinking like a stone, China and Russia proposing a new international reserve currency as foreign creditors attempt to find a way out of dollar assets, and the looming threat of national default by the U.S. on its sovereign debt, the price of the bailouts may ultimately be more than the American people can bear.

    As noted by the Wall Street Journal, the unprecedented actions by the Fed and other government agencies after the crisis began only tell half of the story, and do not give a complete portrait of Bernanke’s term in office. How did the crisis begin? And what role did the Federal Reserve play?

    Writes the Journal, “The real problem is Mr. Bernanke’s record before the panic, with its troubling implications for a second four years. When George W. Bush nominated the Princeton economist four years ago, we offered the backhanded compliment that at least he’d have to clean up the mess that the Alan Greenspan Fed had made. That mess turned out to be bigger than even we thought, but we also didn’t know then how complicit Mr. Bernanke was in Mr. Greenspan’s monetary decisions.”

    How responsible was Bernanke? The Journal answers, “Now we do [know of Bernake’s complicity], thanks to the release of the Federal Open Market Committee transcripts from 2003. They show (see ‘Bernanke at the Creation,’ June 23, 2009) that Mr. Bernanke was the intellectual architect of the decision to keep monetary policy exceptionally easy for far too long as the economy grew rapidly from 2003-2005. He imagined a ‘deflation’ that never occurred, ignored the asset bubbles in commodities and housing, dismissed concerns about dollar weakness, and in the process stoked the credit mania that led to the financial panic.”

    And, just how critical were those easy monetary policies—epitomized by loose lending and artificially low interest rates—in fueling the housing bubble in particular, and other tertiary asset bubbles of the 1990’s and 2000’s?

    Outstanding mortgage debt rose from $3.805 trillion in 1990 to $14.568 trillion in 2007—a 383 percent increase. The national debt itself rose from $3.23 trillion to $9 trillion, a 278 percent jump.

    The money supply behaved predictably as a result, rising from $1.787 trillion to $5.268 trillion over the same period, according to the Ludwig Von Mises Institute. And commodities prices followed as investors hedged against the predictable inflation: gold rose from $386.20 an ounce to $695.39, a 180 percent increase, and oil rose from $23.19 a barrel to $64.20, a 277 percent increase.

    The fact is, without the easy money, these increases would have simply been impossible, which is really the bottom line.

    Without the loose dollar policies, Fannie Mae and Freddie Mac would have never been able to push trillions of dollars of mortgage-backed securities like a door-to-door snake oil salesman all over the world. Those securities would have never been able to rolled into AIG’s derivatives.

    The fact is, the Fed bankrolled the worst gamble in history.

    The American people do not need a Federal Reserve Chairman largely responsible for the policies that caused the bubbles by misallocating resources, causing prices to boom far beyond their real values, which when they popped, wrecked the economy, exploded the national debt, destroyed wealth, and put millions out of work.

    As Americans for Limited Government President Bill Wilson stated yesterday, “America needs a new monetary policy, not more dollar devaluation.” This should include re-anchoring the dollar to gold and full transparency in the nation’s dollar dealings. In short, dollar policy should promote a stable currency, honest credit, and restore accountability to markets by abolishing the “too-big-to-fail” doctrine.

    Bernanke should not get a pat on the head for his role in mopping up a mess he helped to create. He should be shown the door.

    Robert Romano is the ALG Senior News Editor.

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