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Bernanke's Fairy Tale

by Vern McKinley April 12th, 2012 8:44 am

Taking a cue from Dr. Selgin who made a convincing case on this blog regarding the entertainment value of the first installment of Chairman Bernanke’s GW lectures; and after spending an hour and a half of my free time while recently working in the Caribbean listening to Peter Schiff’s critique of the same lectures in an event on Reason TV, I felt the need to watch one of them in its entirety. What a maddening experience indeed. These two gentlemen picked apart the Chairman’s indoctrination with their usual skill and grace, especially with regard to creation of bubbles and discretionary monetary policy. As I am wont to do, my focus was on the Fed’s bailout policy and I happened to catch the third installment of the Bernanke series which involved a discourse on the AIG bailout (about the 45:50 mark):

It's an oldie but a goodie for our Federal Reserve chairman. In one of his recent lectures at George Washington University (GWU), Ben S. Bernanke made the self-congratulatory assertion that the "forceful policy response" led by the Federal Reserve in 2008 helped avoid a more serious economic downturn.

This rhetoric is nothing new. Mr. Bernanke has made similar remarks in the past. As he confided in one interview, "I was not going to be the Federal Reserve chairman who presided over the second Great Depression." It is clear that like Treasury Secretary Timothy F. Geithner, who recently trumpeted the fourth anniversary of his role in the Bear Stearns bailout, Mr. Bernanke is aggressively using the GWU lectures to shape his legacy before he steps down.

During the chairman's one-hour-plus lecture, he dedicated five full minutes (and four PowerPoint slides) to a case study on AIG. In the classic dour assessments reminiscent of 2008, Mr. Bernanke used Chicken Little hyperbole, noting that the "failure of AIG, in our estimation, would have been basically the end." The chairman did not elaborate for the benefit of the students in attendance what he meant by "the end" or the precise connection between the failure of AIG and the end of financial life as we know it, but it certainly made for a dramatic moment during the lecture.

Interestingly enough, one of the GWU students pressed the chairman for more details on the decision-making process underlying interventions like what occurred with AIG. The student, identified by Mr. Bernanke as "Max," boldly questioned the chairman's methods: "Where do you draw the line between bailing out a bank and allowing it to fail? Is it arbitrary or is there some sort of methodology?" Mr. Bernanke meandered a bit in responding to Max and eventually admitted that the process was somewhere in between arbitrary and a set methodology, noting that it was a "case-by-case process" and "somewhat ad hoc."

For the full article, please see today’s Washington Times.

11 Responses to “Bernanke's Fairy Tale”

  1. avatar W.E. Heasley says:

    “It's an oldie but a goodie for our Federal Reserve chairman. In one of his recent lectures at George Washington University (GWU), Ben S. Bernanke made the self-congratulatory assertion that the "forceful policy response" led by the Federal Reserve in 2008 helped avoid a more serious economic downturn.”

    Hence if one purposely leaves out the "forceful policy response" in regards to participation in the creation of the bubble/debacle of one’s own making, then one can merely depict a "forceful policy response" as saving the known universe from exogenous items that were somehow, some way not of one’s own creation.

    Yes, Mr. Bernanke, depression/recession historical revisionist of the first order.

  2. avatar Bill Bergman says:

    In their 1990 book Free to Choose, Milton and Rose Friedman closed a chapter titled "The Anatomy of Crisis" with the following paragraph:

    In one respect the System [the Fed] has remained completely consistent throughout. It blames all problems on external influences beyond its control and takes credit for any and all favorable occurrences. It thereby continues to promote the myth that the private economy is unstable, while its behavior continues to document the reality that government is today the major source of economic instability.

  3. avatar Paul Marks says:

    If there must be a Federal Reserve (and, of course, there should not be) at the very least people like Ben Bernanke should be kept well away from it.

    As for Timothy... that man should be in jail.

  4. avatar Richard Schulman says:

    I wish someone with more clout than I have would take public notice of the fact that Bernanke's Fed policies have little to do with economics and much to do with politics. In the second half of 2008 he killed Republican chances of occupying the White House by contracting the money supply -- creating a severe crisis out of what had merely been a difficulty. Present Fed policies are now nothing more than an adjunct of the Obama reelection campaign. Fed policies of near zero interest rates, a devalued dollar, and massive purchases of non-Treasury paper are aimed at getting Obama over the top next November.

    It's an old story that's been repeated before by many a Fed chairman in cahoots with the incumbent president. But Bernanke goes way beyond Arthur Burns' efforts on behalf of Nixon's reelection in 1972.

    A discretionary central bank is of necessity a politicized one.

    • avatar MichaelM says:

      Richard, I have no idea what you're talking about. In the second half of 2008, the Fed's policy rate declined drastically, the monetary base began to explode and the Fed, overall, took an extremely expansionary stance relative to that it took in the first half of 2008.

      Political business cycles are not a new supposition, but this certainly doesn't look much like one.

  5. avatar Richard Schulman says:

    Michael, have a look at Ramesh Ponnuru, writing at

    http://www.bloomberg.com/news/2011-08-16/loose-money-will-keep-economy-from-sliding-away-ramesh-ponnuru.html
    (or equivalently http://tinyurl.com/3p86yq8)

    and also Scott Sumner, writing at

    http://www.cato-unbound.org/2009/09/14/scott-sumner/the-real-problem-was-nominal/
    (or equivalently http://tinyurl.com/77g5ufa)

    Neither treat the Fed stance in 2008 from a "politicized Fed" stance; they do powerfully argue against the convention view that the economy was awash in liquidity in the second half of 2008.

  6. avatar Richard Schulman says:

    Moderator: please change "convention view" in my latest post to "conventional view". Thanks!

  7. avatar Richard Schulman says:

    What's wrong with this blog? The post I wrote in answer to Michael is still awaiting moderation more than 24 hours after I posted it. Meanwhile, a correction to it that I posted -- meant for the moderator's eyes only -- got posted without moderation and before the post it was intended to correct! May I politely suggest the removal of moderation -- especially in the case of someone who has already logged in -- unless this is necessary and is going to be done in a timely fashion!!

    Here is the post still awaiting the lax or non-existent moderation, with correction:

    Michael, have a look at Ramesh Ponnuru, writing at

    http://www.bloomberg.com/news/2011-08-16/loose-money-will-keep-economy-from-sliding-away-ramesh-ponnuru.html
    (or equivalently http://tinyurl.com/3p86yq8)

    and also Scott Sumner, writing at

    http://www.cato-unbound.org/2009/09/14/scott-sumner/the-real-problem-was-nominal/
    (or equivalently http://tinyurl.com/77g5ufa)

    Neither treat the Fed stance in 2008 from a "politicized Fed" stance; they do powerfully argue against the conventional view that the economy was awash in liquidity in the second half of 2008.

  8. avatar Richard Schulman says:

    Michael, have a look at Ramesh Ponnuru, writing at

    http://www.bloomberg.com/news/2011-08-16/loose-money-will-keep-economy-from-sliding-away-ramesh-ponnuru.html
    (or equivalently http://tinyurl.com/3p86yq8)

    and also Scott Sumner, writing at

    http://www.cato-unbound.org/2009/09/14/scott-sumner/the-real-problem-was-nominal/
    (or equivalently http://tinyurl.com/77g5ufa)

    Neither treat the Fed stance in 2008 from a "politicized Fed" stance; they do powerfully argue against the conventional view that the economy was awash in liquidity in the second half of 2008.

  9. avatar MichaelM says:

    I've been an avid reader of Scott's for a very long time now. His blog is one of the best on the internet, in my opinion.

    However, his cato post there is not an argument against my position. Scott defines the loose-ness or tight-ness of monetary policy in a post-hoc manner, a results based one. For Scott, the Fed wasn't pursuing an expansionary policy because key indicators didn't expand. There's nothing wrong with this view from an on-going policy formation point of view: The Fed should understand today that it's monetary policy back then wasn't expansionary for exactly the reasons Scott cites.

    However, from a historical point of view it's a tautological definition. The Fed thought it was pursuing an expansionary policy in 2008 and you can see this by the(at the time) seemingly drastic steps taken to expand the money supply and push nominal rates as low as possible. The idea that what we're experiencing is a purely political business cycle is total nonsense. The only a priori contractionary policy the Fed pursued in this time period was the interest paid on excess reserves, and that only began a month before the election in early October 2008. The most you can say is that a shaky economy went into actual decline afterwards, but it's really difficult to establish cause and effect here, as it always is in this field.

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