Bernanke's Renomination: Hold the Applause

Morgan Stanley Asia Chief Stephen Roach comments in the Financial Times about President Barack Obama's nomination of Fed chairman Ben Bernanke for a second term.

While America’s head central banker deserves credit for being creative and courageous in orchestrating an unusually aggressive monetary easing programme, it is important to remember that his pre-crisis actions played an equally critical role in setting the stage for the most wrenching recession since the 1930s. It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.

Mr Bernanke made three critical mistakes in his pre-Lehman incarnation: First, and foremost, he was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles. On this count, he stood with his predecessor – serial bubble-blowing Alan Greenspan – who argued that monetary authorities are best positioned to clean up the mess after the bursting of asset bubbles rather than to pre-empt the damage. As a corollary to this approach, both Mr Bernanke and Mr Greenspan drew the wrong conclusions from post-bubble strategies earlier in this decade put in place after the bursting of the equity bubble in 2000. In retrospect, the Fed’s injection of excess liquidity in 2001-2003, which Mr Bernanke endorsed with fervour, played a key role in setting the stage for the lethal mix of property and credit bubbles.

For more on this, see Ben Bernanke Was Incredibly, Uncannily Wrong at the Mises Institute, highlighted by this memorable assessment of the U.S. housing market in 2005:

Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates.

Bernanke was nominated to his first term as Fed chief just three months after having made these comments. How could he have been more wrong?

Roach continues:

Second, Mr Bernanke was the intellectual champion of the “global saving glut” defence that exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia. While there is no denying the demand for dollar assets by foreign creditors, it is absurd to blame overseas lenders for reckless behaviour by Americans that a US central bank should have contained. Asia’s surplus savers had nothing to do with America’s irresponsible penchant for leveraging a housing bubble and using the proceeds to fund consumption. Mr Bernanke’s saving glut argument was at the core of a deep-seated US denial that failed to look in the mirror and pinned blame on others.

Third, Mr Bernanke is cut from the same market libertarian cloth that got the Fed into this mess. Steeped in the Greenspan credo that markets know better than regulators, Mr Bernanke was aligned with the prevailing Fed mindset that abrogated its regulatory authority in the era of excess. The derivatives’ explosion, extreme leverage of regulated and shadow banks and excesses of mortgage lending were all flagrant abuses that both Mr Bernanke and Mr Greenspan could have said no to. But they did not. As a result, a complex and unstable system veered dangerously out of control.

Notwithstanding these mistakes, Mr Obama may be premature in giving Mr Bernanke credit for the great cure. No one knows for certain as to whether the Fed’s strategy will ultimately be successful.
...
It would be the height of folly to reward Mr Bernanke for the recovery that never stuck. Yet Mr Bernanke’s apparent reward is, unfortunately, typical of the snap judgments that guide Washington decision-making. In this same vein, it is hard to forget Mr Greenspan’s mission-accomplished speech in 2004 that claimed “our strategy of addressing the bubble’s consequences rather than the bubble itself has been successful”. Eager to declare the crisis over, the Obama verdict may be equally premature.

The Bernanke reappointment is a welcome chance for a broader debate over the conduct and role of US monetary policy. Mr Obama has made sweeping proposals that give the Fed broad new powers in managing systemic risks. I argued in the Financial Times 10 months ago that the Fed should not be granted these powers without greater accountability as required by a “financial stability mandate” – in effect, forcing the Fed to shape monetary policy with an aim towards avoiding asset bubbles and imbalances. Without a revamped policy mandate, it is conceivable that we could face another destabilising crisis.

Ultimately, these decisions boil down to the person – in this case, Mr Bernanke – who is being charged with the awesome responsibility as America’s chief economic policymaker. As a student of the Great Depression, he should have known better. Yes, he reacted strongly after the fact in taking actions to avoid the pitfalls highlighted by his own research. But he lacked the foresight and courage to resist the most reckless tendencies of the era of excess. The world needs central bankers who avoid problems, not those who specialise in post-crisis damage control. For that reason, alone, he should not be reappointed. Let the debate begin.

The debate is already over - if all goes well, we'll have another asset bubble of some sort, one that is even bigger than the last one and, in another few years, we'll get another victory speech from the head of the central bank.

Comments

[Moon Kil Woong:]

Trust me those in the know are wretching not applauding. The only problem is that the Fed really doesn't have anyone credible to replace him with. And Larry Summers may not be much better.

I guess all this proves is aiding in fabricating a crisis is acceptable if you can give enough free money and pep talks to appease people at the top. I agree fully with Tim Iacano that the past failures should not be overlooked, primarily his died in the wool fantical support of Greenspan style loose to free money solutions to everything.

There is no better bubble inflator than Bernake. Even Greenspan is a rank amature to him. Just watch. When the bubble he knows pops it will be less like a very big baloon and more like a pipe bomb.

Aug 27 05:52 AM

[sheople:]

The sad part is that the United States is one big asset bubble

Aug 27 08:05 AM

[The Geoffster:]

I have not seen much analysis of the political considerations behind Bernanke's reappointment and would conclude that it was the safe move in the middle of a crisis: particularly, if there were real concern that the crisis could worsen in the interim.

Aug 27 08:26 AM

[Stelly:]

I agree with Moon but have been bothered by a more troubling thought - not just with Bernanke but with the policy makers in general. I keep looking for a core set of principals that are at the root of the policy decisions that are being made. I don't even care if they match my personal views and principals. I just find it easier to assess an issue and the effectiveness of the response if I know where the different players are coming from. It also helps me assess the usefulness of my beliefs.

Maybe its just me but I often can't identify a unifying theme or principal to what this government is doing. I have never felt so lost in a matter of public poly in my life (I'm 46). It feels like we are trying to write a novel by randomly pulling words out of a dictionary. When I read Bernanke's comments posted here it really scares me. But its not just the Fed... its congress, the president (both of which I have always had low expectations), Wall Street and Main Street. I feel like I'm watching the pivotal scene in the Wizard of Oz when Toto pulls back the curtain and exposes the Wizard for what he really is - but unfortunately we can't click our heels and go home.

Aug 27 09:27 AM

[robert.b.fe...:]

It's all smoke and mirrors. Hellicopter Ben's reappointment was timed for maximum political theater to distrct people from the real and growing problems. CBO and OMB numbers were wrong, they say off by $2T, (In just a few months) and even the $9T figure is probably low. I have a green solution though: Mr. President, save the forrests, quit printing money!

Aug 27 09:33 AM

[JohnAl:]

"Third, Mr Bernanke is cut from the same market libertarian cloth that got the Fed into this mess. Steeped in the Greenspan credo that markets know better than regulators, Mr Bernanke was aligned with the prevailing Fed mindset that abrogated its regulatory authority in the era of excess."

I find much to agree with in Mr. Roach's criticism of Dr. Bernanke, but the statement above strikes me as either ignorant or a poor attempt at newspeak. It's "libertarian" to be running a central bank manipulating interest rates and creating money out of thin air?

I doubt Mr. Roach is ignorant, so I can't help but think that he's attempting to blame the free market for the Fed's excesses here.

Not that the current system favors MS or anything...

Aug 27 12:39 PM

[RatWatcher:]

Hello,

Is it at all possible that Mr Bernanke simply knows too much to be let go, free to write a tell-all book of where all the bailout money went? Ockham's Razor approach to the otherwise stunning re-nomination of Paulson's enabler.

Aug 28 01:16 AM