Stephen Roach: The case against Bernanke
While most economists have come out in favor of Barack Obama’s decision to re-appoint Ben Bernanke as Chairman of the Federal Reserve Board, Stephen Roach has penned an Op-Ed in today’s Financial Times which highlights the case against Bernanke. It is must reading.
Roach has three main points.
- Before the Lehman bankruptcy, Bernanke was an adherent of the Greenspan-professed doctrine to “clean up after bubbles.” This is what others have called “The Greenspan Put,” otherwise known as an asymmetric monetary policy response – what I would term “lax during the bubble, and loose after it.” Clearly, this doctrine was responsible for much of the carnage.
- Bernanke was also a proponent of the “Asian Savings Glut” theory which puts much of the blame for global imbalances at Asia’s doorstep and exonerates over-consumption by American citizens for a credit crisis which began in America. I have called this the Blame Asia meme. While there may be excess savings, it is disingenuous to blame Asia for problems created in the United States.
- Bernanke, like Greenspan, is an ultra-free market Libertarian who believes markets always are better informed than regulators. This takes libertarian views to an extreme which I have dubbed “Deregulation as Crony Capitalism.” I see a more nuanced belief in free markets as more appropriate.
But Roach goes on to opine that Obama, with his early decision to re-appoint Bernanke, is signalling he believes the credit crisis has ended, a calculation that Roach believes may be hasty.
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. The worst of the US recession appears to have been arrested for now – a fairly typical, but temporary, outgrowth of the time-honored inventory cycle. But the sustainability of any post-bubble recovery is always dubious. Just ask Japan 20 years after the bursting of its bubbles.
While financial markets are giddy with hopes of economic revival – in part inspired by Mr Bernanke’s cheerleading at the Fed’s annual Jackson Hole gathering – there is still good reason to believe that the US recovery will be anaemic and fragile. US consumers are in the early stages of a multi-year retrenchment as they cut debt and rebuild retirement saving. The unusual breadth and synchronicity of the global recession will restrain US export demand from becoming a new growth engine.
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.
Roach makes a lot of points I have done over the past few months. Here’s my translation of what he is saying with links to previous articles covering this ground.
- Recovery of some sort seems to be at hand.
- However, we may be seeing an inventory correction and nothing more.
- America could be headed toward a Japanese-like decade or more long period of stagnant growth aka the modern Depression.
- After all, consumers are not coming back to the party.
Much of the blame for this rests with Bernanke. As a result, Roach believes Bernanke should not be re-appointed:
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.
Please read his entire article here. See other sample reactions here, here, and here.
Obviously, I agree with Roach’s points as they echo many posts I have written on this site. Nevertheless, one has to ask, “what are the alternatives?” I am sure you know the other names up for consideration. And don’t tell me Volcker, Galbraith or Stiglitz. That was never going to happen.
Update: I wouldn’t characterize Ben Bernanke as “cut from the same market libertarian cloth,” as Roach does. I would suggest he has Libertarian leanings, but was probably the least inclined between himself, Paulson and Geithner to let Lehman fail.
Whether or not Bernanke is at the Fed’s helm, my issue is how folks can even entertain the idea of a “recovery”. Here is a list of things that tell me no such thing can occur no matter who runs the Fed or how much “liquidity” (fiat money printing) or “credit” (debt) it issues.
1. 70% of the US GDP was based on consumer spending. The consumer is out of work (9.5% U3, 17% U6) and broke (CRE collapse, foreclosures and loan defaults rising, record credit card balances and defaults).
2. Production has fallen by depression era amounts in percentage terms.
3. Protectionism has begun with China restricting exports of key rare metals – https://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6082464/World-faces-hi-tech-crunch-as-China-eyes-ban-on-rare-metal-exports.html.
4. Record budget deficts, record falls in tax receipts, record issuance of government debt in the UK, Ireland, USA and several more key countries.
5. Baltic Dry Index shows global trade at a near standstill in relative terms when compared with years 2000 – 2007.
6. Government money printing and stimulus programs can only temporarily replace consumer demand and will only put off the “deleveraging” (i.e. global GDP reset to a new lower level).
stop it, you’re depressing me. :)
It was folly to appoint as Fed chairman an academic very strongly identified with a specific interpretation of the events of the Thirties. The point is not simply that there are other interpretations of this period — Yves Smith referred to Peter Temin’s in a post not long ago — but that good policymaking requires flexibility of mind: this is more likely to be found in intelligent students of historical debates than in protagonists in them.
This is all the more so, as the lessons of the past are commonly less than totally clear. When what is at stake is the interpretation of historical events one does not want to see repeated — and here, depressions have much in common with wars, and failures in wars — a crucial question is generally what would have happened, had some alternative course of action been pursued. But although some such counterfactual arguments are clearly much better than others, there are commonly massive uncertainties about them — particularly in relation to the possible unintended consequences of such alternative courses.
And also, even where the argument that an alternative course would have produced better outcomes in the past seems overwhelmingly cogent, it is commonly a moot point whether present conditions are sufficiently similar to make its lessons relevant.
In Bernanke’s case, his academic career was largely built on developing the Friedmanite view that a different monetary policy, after the collapse of the Twenties stock market bubble, would have averted the Depression: and on this basis he produced his famous advocacy of ‘helicopter money’. Precisely what many of Greenspan’s critics had anticipated was that the unintended consequence of his use of monetary policy to prevent the collapse of bubbles impacting the real economy would be the blowing up of further bubbles: and that the outcome would be a dead end from which there was no good means of exit.
For Bernanke to concede validity to such criticisms would involve calling in question the validity of practically everything he has done, both as policymaker and as academic. It would mean his having to ask himself whether his whole life might have been a disaster.
Unsurprisingly, then, when the anticipations of his critics were born out by the facts, his response was denial. When the ludicrous — but not highly dangerous — technology shares bubble was replaced with property bubbles threatening to bring down the whole financial system, he insisted that there were no such bubbles. As for his championing of the ‘savings glut’ argument — this again looks like a man determined to disavow the suggestion that, far from creating a ‘Great Moderation’, he and his ilk were largely responsible for creating a fundamentally unstable global economy.
True to form, Bernanke now seems to have convinced himself that the events of a few months ago were an irrational panic, to which his ‘helicopter money’ policies have provided an adequate answer. So we have at the helm of the most important central bank in the world someone whose view of the global economy is delusional.
What Bernanke is also certainly not going to face up to is the force of the argument that he and Greenspan have debauched the Western financial services industry. Investment managers who concentrate on fundamental value simply go to the wall in a world of serial bubbles. The name of the game becomes judging into which asset class the torrents of liquidity unleashed by central bankers are going to go, riding the bubble, and getting out before it bursts.
It may indeed be the case that there are, at present, no better options than Bernanke. But to say that seems to come uncomfortably close to suggesting that there are no figures at the heart of the U.S. policymaking establishment who are capable of coping with a crisis which the ineptitude of the economic profession has largely created. It is a bit as though, when Lincoln was casting round for alternatives to George B. McClellan, people had come to him and said: Of course, we know he hasn’t a clue how to win a battle — but that’s what all our West Point people are like: all useless.
How dim-witted can one person without losing their ability to–I dunno, brush his teeth?–to assert that Bernanke is a “market libertarian”? Is Roach serious??? The fact that Bernanke heads an organization (that happens to violate the US Constitution, by the way) that manipulates interest rates and the money supply–at a minimum–is itself the evidence that neither Bernanke nor the Fed represents “market libertarianism”. At best, this assertion represents simplemindedness and at worst outright mendacious drivel.
I have added this line to the end of the post: Update: I wouldn’t characterize Ben Bernanke as “cut from the same market libertarian cloth,” as Roach does. I would suggest he has Libertarian leanings, but was probably the least inclined between himself, Paulson and Geithner to let Lehman fail.
Hi. Thank you for the reply. I do need your help, though, in understanding how Bernanke in any way represents “Libertarian leanings”. By what definition? Libertarianism, as represented best in America by Thomas Jefferson, does not in any way permit a central bank; does not in any way permit the manipulation by a cartel of market forces through its intervention into the market via inflation and contraction of the supply of money; does not in any way permit the “moral hazard” associated with credit expansion based upon “easy money”. Bernanke is a tool, but he has no more “libertarian leanings” than your average twisted central banker the world over.
Name, I think you have a fairly narrow view of what it means to be Libertarian. In an ideal world, many believe the central bank shouldn’t even exist. But I am NOT talking solely about monetary policy when I use the word Libertarian, rather liberty in a general sense. This would a believe in individual freedom, free markets, civil liberties, and so forth.
For instance, the Libertarian Party platform mentions all of these things but nowhere does it explicity state that it wishes to abolish the Federal Reserve, though it does call for the repeal of income taxes. The party does abhor “inflationary monetary policies” and calls for a repeal of legal tender laws. Being a Libertarian or having Libertarian leanings is not just about monetary policy.
One final word: anyone who is foolish enough to believe that self-regulation in finance works – that allowing an economic ecosystem to flourish without the government enforcing law and acceptable codes of behavior – is either an anarchist or not particularly realistic.
Anyone who thinks that by repeatedly bailing out those who make catastrophic mistakes we are ever going to create the environment which will improve the living standards of ordinary citizens isn’t being realistic.
Let the bad banks be wound down and let the strong survive. Oh yes, there are a large number of strong banks not involved in pass the parcel derivatives trading and who didn’t write huge amounts of NINA loans. They’re the ones being screwed right now for their prudence.
This way, we would have a banking crisis perhaps every 100 years rather than every 20. It is impossible to contain irrational exuberance in the long run as generational handover occurs and memories are not passed down, but we can at least try to maximise our period of stability.
Banks are still marking their crap at or close to par, including the very worst – commercial mortgages, 2nd liens and HELOCs. Anecdotally, they’re even going down to the auctions for their own repo’d properties and bidding par (ie 3x what anyone else will pay!), just so they can fraudulently shore up their balance sheets. How long can this realistically continue?
In addition, they are being propped up by governmental lifelines being made possible by the massive issuance of Treasuries, which cannot continue indefinitely, lest the government trash its own currency. If the vaunted recovery does not come (and why/where should it come from? consumers who are more leveraged today than at any point in history? yeah right), we will be in a Japanese zombie bank scenario with the lies being passed round in a huge circle jerk of BS.
RTC 2? Yes please.
Glass Steagall 2? Yes please.
Prosecution for the modern day Keatings? Sign me up.
All perfectly achievable goals with the right political will.
Hi, Edward! In response to “Name” below, that’s me.
Jeffersonian Libertarians would indeed call for the end of a central bank in this country (the USA) as it violates the US Constitution. Unfortunately, the vast majority of so-called Americans demonstrate such profound ignorance of their own governing documents it staggers the mind, but I digress.
Also, no where did I state (and perhaps you are not referring to me, but just making a statement in general) that economic activity be absent of law. As a Libertarian, the law that forms the basis for regulation and the means by which violators of the law are punished is natural law–the law of Locke, Jefferson, et.al.–the law that gave birth to the US Constitution–the document that despite its flaws is the single greatest means of regulating government–the greatest threat to liberty the world has ever known. Central banks, including the US Fed, are but a tool of criminal bankers to transfer wealth and seduce governments. Not that I have any strong feelings on the subject…