As readers of this blog know, in an astounding feat of oblivious irony, Time magazine has chosen the man who very likely just broke the world as “Person of the Year”. In my last post, I commented on the propaganda aspects of the choice. In this article, I would like to address the woeful economic content of Time‘s corresponding hagiographic piece on Ben Bernanke and the Federal Reserve, line-by-line.
the Fed controls the money supply. It is an independent government agency that conducts monetary policy, which means it sets short-term interest rates…
Indeed, in other words it sets the gross market rate of interest. It has absolutely no control over originary interest (the actual ratio of prices of present goods over future goods). Therefore, whenever it manipulates the former, it keeps it from trending toward the latter, which can only lead to malinvestment. The world might be a much better place, if Ben Bernanke simply read Human Action, chapter 19.
…which means it has immense influence over inflation, unemployment, the strength of the dollar and the strength of your wallet.
…AND over the structure of production: and a wholly pernicious influence, at that. Let’s take the items under the Fed’s purview which Time listed in turn.
- Inflation: Over the long term, ALL the Fed has ever done with inflation is modulate how fast it inflates.
- Unemployment: The only way the Fed “alleviates” unemployment is by inducing unsustainable structures of production, thereby creating jobs which, while surely appreciated by those who get them, on balance only serve to consume capital, thereby impoverishing society as a whole.
- Strength of dollar/wallet: The only thing the Fed has done since 1913 to the strength of the dollars in our wallets is to dwindle it.
And ever since global credit markets began imploding, its mild-mannered chairman has dramatically expanded those powers and reinvented the Fed.
Global credit markets needed to implode, because they were inflated all out of proportion in relation to the actual amount of capital on the planet, given the going rate of time preference. By trying to keep it from imploding, Bernanke only prevented the loan markets from adapting themselves to that reality.
Professor Bernanke of Princeton was a leading scholar of the Great Depression. He knew how the passive Fed of the 1930s helped create the calamity — through its stubborn refusal to expand the money supply and its tragic lack of imagination and experimentation.
This is either unacceptable ignorance or unforgivable deception. Central banks lower interest rates by expanding the money supply and flooding the loan market with new money. And to what degree did the New York Fed (which was then in the monetary saddle) do this after the 1929 stock market crash? As economist Robert Murphy tells us, in The Politically Incorrect Guide to the Great Depression and the New Deal, the New York Fed responded to the crash with unprecedented easy-money measures:
On November 1, 1929, just three days after Wall Street’s Black Tuesday, the Fed slashed its discount rate by a full percentage point. Then fifteen days later it cut again, to 4 1/2 percent. Throughout the following year, it cut five more times, so that by December 1930 the New York Fed’s discount rate had fallen to 2 percent. This was already a record-low for the Fed, but it cut further still, reaching 1 1/2 percent in May 1931.
I guess central bank measures only qualify as “imaginative” if you push rates down to practically 0% like Helicopter Ben has done. We should all be glad the New York Fed wasn’t anymore “imaginative” (irresponsible and foolhardy) than it already was.
Chairman Bernanke of Washington was determined not to be the Fed chairman who presided over Depression 2.0. So when turbulence in U.S. housing markets metastasized into the worst global financial crisis in more than 75 years…
…turbulence made necessary by a housing bubble inflated by Bernanke and his predecessor, Alan Greenspan…
…he conjured up trillions of new dollars and blasted them into the economy
…which are nothing but media of exchange, and will only serve to transfer and destroy wealth, but create none…
…engineered massive public rescues of failing private companies;
…which only created oceans of moral hazard and propped up wealth-destroying ventures at the expense of foregone wealth-creating ventures…
…ratcheted down interest rates to zero; lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash; jump-started stalled credit markets in everything from car loans to corporate paper; revolutionized housing finance with a breathtaking shopping spree for mortgage bonds;
…all of which will only serve to induce unsustainable business projects and consumption levels…
…blew up the Fed’s balance sheet to three times its previous size;
…which while also contributing to the previously listed effects, may very well end up leading to Weimar-level hyperinflation.
…and generally transformed the staid arena of central banking into a stage for desperate improvisation.
…because apparently markets reallocate capital better when there is a single central planner “desperately improvising” with crude aggregate numbers.
He didn’t just reshape U.S. monetary policy; he led an effort to save the world economy.
“Effort” being the operative, and perhaps generous, word here.
No wonder his eyes look tired.
Poor thing; squandering the world’s wealth must be exhausting business.
The last Fed chair, Alan Greenspan, inspired an odd cult of personality. Bernanke hoped to return the Fed to dull obscurity. But his aggressive steps to avert doomsday — and his unusually close partnerships with Bush and Obama Treasury Secretaries Henry Paulson and Timothy Geithner — have exposed him and his institution to criticism from all directions.
“Unusually close partnership”? Is this the “independence” Bernanke’s so worried about with regard to the Audit the Fed bill?
Bleeding-heart liberals and tea-party reactionaries alike are trying to block his appointment for a second four-year term. Libertarian Congressman Ron Paul is peddling a best seller titled End the Fed. And Congress is considering bills that could strip the Fed of some of its power and independence.
Those dread populists obstructing an honest technocrat! Nicholas Biddle must be sympathetically rolling in his grave.
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BRAVO!
I laughed out loud when I read,
“Poor thing; squandering the world’s wealth must be exhausting business.”
LOL! Thank you for that!
Oh, that Stengelian wordsmithery! I got a kick out of this:
“Libertarian Congressman Ron Paul is peddling a best seller titled End the Fed.”
I picture an overcoated Ron Paul lurking in a shadowy alley: “Psst buddy, wanna buy a best seller?”
If you read the main purposes for the fed’s existence, from Wikipedia the first three points are as follows …
Obviously Bernanke is a total and unmitigated failure. Employment? Price stability? Safety and soundness of banks? Stability of the financial system?
The man is a menace. Even a simpleton can read these major goals of the fed and realize that Bernanke should have been fired a long time ago, and he should consider himself lucky if he is not prosecuted for fraud.
Time magazine are brazen liars for publishing this garbage.
Bernanke and his cabal ought to have been tried and, since I am against the death penalty, put away for life. Of course, it would be better to just deny these authoritarians a mechanism like a central bank. But does he deserve any better a lot than other deposed dictators and their minions of the past?
Surely the Fed’s fueling of the American war machine has caused more death and suffering than Saddam Hussein. Look what he got.
Bernanke is found guilty in absentia. Let him consider himself lucky, for now, to get off without hanging.
What do you expect in a world of war escalating peace prize presidents and Keynesian Poly Anna Op-Eds.
Reminds me of Münchhausen Syndrome. The sickness is endemic in the system.
Personally, I think Bernanke should be Man of the Year. Not because I like what he has done, but at least more attention is being brought on to the Fed. Isn’t this what we Austro-libertarians have been bitching about all these years? We just need to be much more vocal.
http://fee.org/media/audio/costs-of-inflation/
well, bernanke is not universally condemned by all austrian economists. the monetary equilibrium adherents cut him a little slack in his noble fight against deflation. listen in particular from 1:12 in horwitz’ debate.
“…bernanke probably did the right thing last fall, but he way overdid it…”
Newson,
Nice clip. Horwitz does say, to paraphrase, that ‘in a world of central banking an increase in the money supply to counter other effects would have some bad effects but the good would outweigh the bad’.
First, for who I want to ask? Does he say this and mean that central banking is bad, but it is less bad when it reinflates to deal with its own consequences of expanding the money supply?
This would be analagous to saying that slavery is bad, but a slave master that buys his slave’s family members as well in order to mitigate the slave’s suffering is better overall. Is increasing slavery better than doing nothing?
Likewise, isn’t monetary destruction and victimization increased?
Tyler Cowen and other fans of Bernanke and the Fed takeover exemplify one of the attractions of dictatorship: they see in Bernanke an expression of their own desires for control.
Horwitz, it seems, doesn’t defend free banking as such, but only in comparison with central banking. It’s easy to win a debate when you set the rules to your advantage.
Is The ‘Person Of The Year’ Good Or Not So Good?
You say “Impoverisher of the Year” which is true if you look at the ones who are being stolen from, but Bernanke did not impoverish the recipients of the trillions of dollars.
I do agree with the beginnings of the title you have chosen to give Bernanke, “Imp . . .” He is impish as even the article in Time Magazine calls to our attention.
But that is just the beginning. He is also the poster child for the ‘economic recovery.’ So all we have to do is act like an empiricist and add nonsensical terms to get the answer to our questions: Imp + poster = Imposter.
So there you have it, Ben Bernanke is an Imposter! I will put it in terms popular to the trivial pursuits of the media – Ben Bernanke is the “Imposter of the Year!”
It makes sense. He is the chief counterfeiter which means that the money that he is generating is fraudulent. That makes him an imposter.
And he is the essential ‘tool’ of the unConstitutional coup since without the funny money these economic terrorists could not pay for the corruption: they could not pay for their fascist schemes to keep the parasitic corporations plump from the blood shed around the world, nor could they pay for the socialism that props up the public indoctrination using ‘education’ and which makes ‘voters’ dependent on socialism for their income (including the control of the media).
Oh yes Ben Bernanke is an imposter and so is the unConstitutional coup behind it all.
I read columns on this website out of academic interest (I’m an economics student), but do not agree with austrian economics.
You all seem quite vitriolic about the Fed chairman. Perhaps you should recall that Bernanke is not a rich man or a liar. He’s an academic who does what he thinks is best. If he wanted to, he could resign his post and receive multimillion dollar consulting contracts instantly.
The fact that he hasn’t reflects an earnest desire shepherd the economy through crisis. Of course, you all believe that he’s the opposite of a shepherd, but in that case he’s just a misguided man, not an “imposter” who should be “put away for life.”
Dear John,
What then explains Ben Bernanke’s ‘earnest desire to shepard the economy’ into the crisis?
As an ‘economics student’ you must have some awareness of the timing of these events and of the statements made by Bernanke all along the way.
And as an ‘economics student’ you must have some understanding about why counterfeiting is considered a crime and that it matters not whether it is some crook printing up money in his/her basement or some ‘academic’ printing up money at an unbelievably massive scale and spreading it out all over the world through the credit channels exclusively ordained for the world’s reserve currency – it is still a criminal act.
Bruce,
I’m not going to write an essay about quantitative easing for you. I understand your disagreement with Fed practice and am not here to defend it.
What I do wish to point out is that the rhetoric espoused, in commentary and in the formal literature of this site, expresses a strong, almost populist resentment against the status quo that ultimately will fail to attract any serious political consideration.
Followers of Mises would see progress if they spent more time publishing reasoned responses to the mainstream academic line and less time denouncing that line as “criminal” and “evil.”
John,
You strike me as a Joker, in the Batman sense.
Regards,
Mal
John,
I worked for public school technocrats that handed me a large book on ‘causal inference’ and intimated that it was their gospel. For all the massive quantities of technical jargon they threw around, their primary argumentation always came down to moral pontification. “We must use the Fed government to fix these schools because it is the right thing to do.” The science always came after the speech. Rationalize the power after you get it via moralization, their actions said.
When you mention “quantitative easing” in attempts to move the conversation into technical aspects I want to say hold on just a minute. What assumptions are you making a prior to coming to a point in time and circumstance where “quantitative easing” would become relevant?
In other words, let’s hear your arguments for implementing a fiat system in the first place- from both a scientific and moral basis. Doesn’t action require both angles of analysis?
When I brought up Saint Simon and Comte, early positivist thought, the technocrats I dealt with had no idea what I was talking about. Nor did they understand or hear of any argument against ‘scientific management’ of society via government. Especially Mises’s.
I am willing to bet that we agree that stealing is wrong. Do you believe what Bernanke and co. do is not stealing? Or is it that maybe his ‘science’ trumps the moral angle? Quite possibly you might think that both his science and morality are squared?
Or is he wrong on both counts but means well?
Now tell me, should Bernanke’s action be judged by a different standard than you and I?
Hi John,
As a fellow economics student, I would hugely appreciate your top few reasons for not being an Austrian, because once on this side it is difficult to remeber how you could previously have thought differently and so it will be a very helpful reminder for me.
If you feel that they are not “criminal or evil” as you put it, can you suggest what gives them the right to imprison two individuals who concentually use a currency other than their for their own private exchange? If I arbritarily took you to prison, you’d think I was pretty criminal or evil.
As to being taken seriously by a bunch of evil criminals – we frankly do not care. Most Austrians are more than happy for the government to damage itself throught its flawed economic reasoning.
You guys seem to get too caught up in made up “moral” dilemmas and as a result don’t spend enough time looking to the practicalities of competing policy proposals.
I don’t know if the Fed’s management of our fiat-based currency is or is not stealing. In the present case (whether or not Ben Bernanke is a good guy) it’s not an issue. If Ben hadn’t of injected trillions of dollars into the economy, if interest rates hadn’t hit zero, and if the evil (I’ll go ahead and call them evil) bankers hadn’t been bailed out, the country would have, no doubt about it, had another Great Depression. Ex: Bank of America runs half the country’s financial transactions. No bailouts=BoA goes under. What happens to the real economy if half of all financial transactions can’t happen? Disaster.
What would you guys have done? Just let the blessed “free market” run its course? Because I hate to break the news to you, but market failures exist, and sometimes the big bad gov’t has to do something about them.
I think Mises Theory of Money and Credit makes a lot of sense. So does Rothbard’s nominally crazy gold-standard w/ 100% reserve requirements. But Austrians, like everyone else, need to think about the here and now. Ben couldn’t just say “gee I was wrong about this whole fiat currency thing” as the financial sector came tumbling down. He had to act within the limits of the system, and he did.
Ben saved the world, thus he’s Man of the Year. Side note: housing bubble inflated before he took office. He didn’t create the problem. He hasn’t had a weekend off in over a year. He’s doing hard time to save you guys, and you ought to thank him.
Matt,
How do you simultaneously buy Mises and Rothbard but then say that Bernanke saved the world? Have you actually read Austrian takes on what causes depressions? Not allowing the corrections after monetary pumping causes more damage than the initial inflation. The Fed today is merely transferring the corrections out of BoA etc. and putting the cost on the great majority of people. This inflation will lead to yet another massive round “malinvestments” as well.
You want to talk policy in terms of what would be the best solution economically? A: Close down the Fed, let the banks fail, and make money a denationalized solution. Sure, many elites will be returned to ordinariness- but they had it coming.
The most efficient and peaceful way to expand the division of labor does not include central banking or fiat currency.
Sure, Ben saved some people…at the expense of the powerless.
Fallon & SA,
No, I do not agree that Bernanke is “stealing.” How can he? Anything that says “Federal Reserve Note” on it is his prerogative. By the same token, he is not “criminal,” since he does nothing illegal. The law is the law, for better or for worse, and he hasn’t broken it.
To judge him as “evil” shows nothing but self-righteous arrogance. You have no idea what goes on in the man’s heart or mind.
I’m curious, what would you have done if you had control over the FOMC during the last 18 months?
“So does Rothbard’s nominally crazy gold-standard w/ 100% reserve requirements.”
maybe it isnt so crazy.
when someone got a gold or silver coin….there probobly wasnt to much doubt about the closing of the transaction.
gee..hope this clears.
if technical issues could speed up 100 percent reserved metal payments and transfers i dont see it as being crazy at all.
maybe banks woul dhave developed there own settling and lending network without making everyone else accept it.
John,
So if Congress enacted a law stating that everyone named John must don underwear on the outside of the pants you would comply and deem it just?
If I was on the FOMC I would have pulled a Daniel Ellsberg.
John, I will grant you that we cannot know someone’s mind. But we can know their actions. Stripping the situation of moral judgement, it can be seen clearly that Bernanke’s actions have wrought a destruction materially beneficial for the few at the expense of the many.
Comment That Bernanke Does ‘Nothing Illegal.’
“since he does nothing illegal”
None of the individuals recently making comments and admitting that they have only a fragmented understanding of Austrian economics have had the integrity to comment on counterfeiting.
Counterfeiting has been ‘illegal’ in civilized society from the very beginning of trade between human beings. In fact it was not only illegal but a generation ago was considered worthy of the death penalty – like murder and arson – because it is such a heinous act.
Play games with words as much as you like. Go ahead and ask Ben Bernanke if it is ‘illegal’ to print money out of thin air. Take his word for it. Believe that war is peace, that counterfeiting is prosperity, that propaganda is education, that what you are studying is economics, and that the Nobel Prizes are just as free from political manipulations as Time magazine’s “Person of the Year!”
Say an Austrian economics mind-ray was used to reprogram Bernanke’s thinking. What would he have done instead of what he did do? Given the existing situation, would the new and improved Bernanke really have done nothing and recommended doing nothing? Was there no best alternative in the spectrum between quantitative easing and doing nothing? Is there no Austrian economics suggestions on how to “manage” the bust in order to ease into it and minimize the pain for the average Joe?
Cooper,
Remember that the initial damage to the economy comes in the first round of inflation, when things are lookin’ up, not when the downward spiral ensues. No Austrian analysis can take place without the use of time.
The thing is, you are using a static model. ‘The house is on fire and what are you going to do?’ The Austrian looks at the hose and smells gasoline; the Bernanke types see only water.
The Austrian argues that the Fed sees clear liquid and calls it water for lack of having a nose.
Fallon,
You say
“Have you actually read Austrian takes on what causes depressions? Not allowing the corrections after monetary pumping causes more damage than the initial inflation. The Fed today is merely transferring the corrections out of BoA etc. and putting the cost on the great majority of people. This inflation will lead to yet another massive round “malinvestments” as well.”
The answer is I’ve read some, and while I think many points are valid, I disagree with others.
I think you and the other Austrian flag-wavers on this site fail to understand the “too-big-to-fail” dynamic of the recent financial meltdown. BoA would have taken the whole economy with it had it died. Allowing market corrections in such a scenario was not possible. Ordinarily, I agree that recessions can be painful episodes that make the patient stronger. However, we couldn’t let this one run its course, because the patient would have died. You seem oblivious to just how close we came to epic disaster this past year. There is no way that the consequences of Bernanke’s recession-fixers will outweigh the benefits of dodging what they did.
Even if Bernanke were to have had an Austrian ephiphany on the night of Lehman’s failure, he couldn’t have done other than what he did. Even if he thinks the Fed is stealing, he had no choice but to bail out the economy…if he hadn’t a quarter of Americans (and ordinary, average Americans too, not just bankers) would have been unemployed.
I will also point out that the bailouts are only bad for wider society if we have either inflation or tax revenue loss. We’ve had a net gain in taxes (had the economy died we’d have lost lots of taxes) and we actually experienced deflation throughout much of 2008.
I won’t respond to further posts. God bless America, and John Maynard Keynes too.
Matt,
You are like the neoconservatives drumming up unfounded fears of terrorism in order to rationalize further government takeover. I am not moved.
Matt,
If there is more terrorism it is because the fixes the government initiated have created blowback, not to mention all the costs to liberty and prosperity the process of foreign intervention entails.
It is you that remains oblivious to how the Fed damages the economy and that the Depression comes from further policy- price and wage fixing, reinflation, and increased spending after corrections are (attempted to be) papered over.
Further, you should know that inflation is the increase in money supply, not the nominal changes in price that ensue. Did your hero Keynes account for this?
I love Rothbard’s line when he says that Keynes died and left us with the long run….
“Given the existing situation, would the new and improved Bernanke really have done nothing and recommended doing nothing? ”
i dont know if what was reported concering banks and large corporations was true or not…the news media will readily report untruths.
how many business actually do fail each year and why are they not bailed out?
i expect some overseas tycoons would have probobly stepped in rather quickly to profitatize various troubled industries.
Uuggghhhh! This is the idiocy about which I was talking concerning the “flame wars”! Matt and John are just being “open-minded,” right, and we should be politically correct and thoughtfully consider what they have to say? Balogna! Quantitative easing=Orwellian Newspeak for inflation=counterfeiting! Pure and frickin’ simple! Whether the government does it or private citizens, counterfeiting is illegal and harmful for a reason! Hell, if government is “of, by, and for the people,” why have the government inflate the currency, why not allow all the private citizens to counterfeit, for “their own good”? Sure, Bernanke “saved” us from a depression, but the depression is NECESSARY to return the economy to sustainable growth, and the apparent avoidance of a greater downturn only means that the inevitable downturn has been delayed and EXACERBATED. In the short-term, sure, it’s quite possible that Bernanke prevented recession, but that’s not the point, and in fact, that’s the worst thing he could have done. Even if he hasn’t inflated another boom, he’s inflated a “non-recession.” Whatever happened to “there’s no such thing as a free lunch”? They teach that stuff to you two in your econ 101 classes? When you praise Bernanke for avoiding recession, you praise him for giving an apparent free lunch. Not gonna happen! How can printing money magically fix anything? That’s the kind of delusional thinking in which only a naive child would engage. The fact of the matter is that the malinvestment and the misallocation of capital is equivalent to a retrograding of the economic clock; in other words, a recession reveals the fact that the wealth of the country, in truth, has been reduced to a level previous in time, so that we can’t lie to ourselves and believe that that wealth is still there and that we can “access” it and “harness” it and “enhance” it merely by printing money, as if that were our only obstacle. Geeze. The wealth is GONE; that’s why there’s a RECESSION. It’s not like you have a clogged toilet and all you have to do it is flush out the clog with increased ex nihilo fiat liquidity; there is no frickin’ TOILET! The only way to rebuild that wealth is to let the recession take its course, to let the free market do its thang, to accumulate capital and resume the discovery process, and to let the price mechanism reflect the underlying REAL state of affairs. Deflation is necessary and proper, because all it means is that all that artificial excess credit–credit that was based on nothing and represented nothing–is disappearing and allowing economic actors to see the true state of economic affairs via the price mechanism; inflating that only distorts the price mechanism and hinders the market’s ability to resume true growth.
UUUGGGHHHH!!!
“I won’t respond to further posts.” Typical socialist cowardice in the face of logical necessity. Inflation is, BY DEFINITION, an increase in the money supply? Are you claiming, contrary to this thing called “reality,” that that hasn’t happened? Do you not understand that rising prices are a CONSEQUENCE of inflation and not inflation itself? Are you aware that true unemployment statistics–not the government-fudged ones–are pretty close to one quarter? Are you capable of understanding that employment, per se, is not an end unto itself, even to those employed? Not just idiocy. Lunacy. Howl.
Please don’t engage government agents masquerading as students.
Swietnie!
you help us, thank you
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