A Reader’s Guide to Bernanke’s Preemptive Attack



Ben Bernanke is taking no chances. With his confirmation hearing for continuation as chairman of the Federal Reserve System only days away, he has written an op-ed for publication in Sunday’s Washington Post. We may interpret this article as a preemptive attack on his congressional critics, some of whom will no doubt take the opportunity afforded by next Thursday’s hearing to attack his management of the Fed and, indeed, the Fed itself.

Monetary-policy propaganda is a high art, and lay readers of Bernanke’s article may well be taken in by its artful formulation. Therefore, as a public service, I offer the following brief commentary, interweaved with CNN’s Saturday report on Bernanke’s Sunday op-ed.

NEW YORK (CNNMoney.com) — Federal Reserve Chairman Ben Bernanke, just days ahead of his confirmation hearing, is warning Congress that actions limiting the central bank’s independence could prove detrimental to the causes of financial reform and economic recovery.

Such a warning seizes the high ground by creating the presumption that Bernanke and the present Fed have proved themselves to be beneficial to the causes of financial reform and economic recovery. In the circumstances, that’s a highly questionable presumption. Some of us are inclined to believe that, all in all, the Fed and its glorious leaders, especially Alan Greenspan and Ben Bernanke, got us into our present troubles in the first place and that they have done nothing wise of late to repair the damage they brought on us, acting instead to create enormous risks for our future well-being and, in particular, great risks for the future purchasing power of the U.S. dollar.

In an op-ed piece to be published in Sunday’s Washington Post, Bernanke criticizes two moves aimed at limiting the Fed — a proposal in the Senate to strip the central bank of its bank regulatory powers and a House Financial Services Committee vote to audit monetary policy deliberations and actions.

“These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States,” Bernanke wrote.

I suppose he is referring to the same sort of consensus that Al Gore likes to cite in regard to global warming. We know now, better than ever, that such consensus may well be manufactured by interested parties. I wonder, for example, whether anyone has ever checked to see how many monetary economists have previously enjoyed a grant, a salary, or some other perk from the Fed, or currently do so, or reasonably expect to do so someday.

And about this “economic and financial stability in the United States” that a Fed audit would threaten: Is Bernanke thinking about the stability we enjoyed between the world wars, when the Fed managed to bring about the onset on what proved to be the greatest depression in world history (an accomplishment for which he has previously accepted responsibility on behalf of the Fed)? Or perhaps he is thinking instead about the stability we enjoyed since 2001, when the Fed pushed the Fed funds rate quickly from 6.5 percent to 1 percent, held it at a negative real rate for several years, then pushed it up quickly to 5.25 percent in 2006-2007, then shoved it down quickly to almost zero in the past year? Zounds. It would certainly be tragic if the American people had to give up such remarkable stability. Or perhaps he is thinking about the fact that before the Fed was created, the dollar had retained its purchasing power more or less constant for more than a century, except for transitory war-related ups and downs, but since the Fed’s creation, the dollar has lost more than 95 percent of its purchasing power. Who calls this degree of debasement stability? Yes, it’s more stable than Zimbabwe’s currency. Bravo, Fed: you’ve yet to generate hyperinflation. But you may still do so before the present mess is completely washed away.

Let’s get serious. If the Fed is known for anything historically, it is for first pushing the monetary accelerator to the floor, then stomping on the monetary brake. To praise this outfit for its contribution to financial and economic stability is akin to praising Josef Stalin for his commitment to human rights.

Bernanke says the congressional moves are a byproduct of the public frustration over the financial crisis and the government’s response, especially the bailout of large banks. (Fed rage boils on Capitol Hill)

Odd that people would be upset, eh? Just because many of us have had our dreams of retirement destroyed and our very survival menaced by these monetary rulers of the universe. We need to take a more balanced view: even if you and I have been nearly wiped out, the kingpins at Goldman Sachs and Bank of America are doing very well. People who bought credit default swaps from AIG got their money, didn’t they (actually our money, but that’s only a detail)? So all in all, the country is in pretty good shape, on the average.

“The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society,” he wrote.

Yes, it is distasteful when we little folks have to take a financial beating so that the rich and well-connected can flourish; we do tend to get a bitter taste in our mouths. But, then, we certainly don’t want another Great Depression, do we? But wait a minute. How does Bernanke know that if, say, the government and the Fed had not taken the slew of outrageous measures they have taken in the past fifteen months, another Great Depression would have occurred? I have a Ph.D. in economics, same as Bernanke, and I’ve been a professional economic historian of the United States for more than forty years, and I don’t know this thing he claims to know. Does he have a pipeline to God? (A more reasonable hypothesis is that he is God’s agent on earth, put here to punish us for our sins.) This constant reference to an impending Great Depression makes for excellent politics of fear, but where’s the theoretical and historical meat? My best guess is that had the government refrained from all of its extraordinary interventions of the past year or so, the worst of the adjustments would already have been made, and a genuine recovery would now be in progress. Instead, thanks to Bernanke and Co., we may never see a flourishing economy in this country again. Argentina and other countries have been ruined by a great deal less meddling.

But the Fed chairman says that, while reforms are needed, “we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.”

Ditto my earlier comments on stability.

Among the ideas he supports is development of a special bankruptcy procedure for firms “whose disorderly failure would threaten the integrity of the financial system — to ensure that ad hoc interventions of the type we were forced to use last fall never happen again.”

Note the language: “Interventions of the type we were forced to use last fall.” Two questions: who is this “we,” and who “forced” these actors to do what they did? From my perspective, these actions look like the work of a handful of people with very close connections to the titans of Wall Street who had got their asses in a wringer by making foolish bets – well, in retrospect, not foolish, perhaps, making due allowance for the “Greenspan put,” which allowed them to assume (correctly, it turns out) that if they got their asses in a wringer, the Fed (and, in a really bad situation, the Treasury) would bail them out and, all things considered, they would still come waltzing out of the devastation (for other people) smelling of roses.

Bernanke’s column comes ahead of a Senate Banking Committee hearing, scheduled for Thursday, considering his nomination for a second term as Fed chairman. President Obama announced the nomination in August.

The last sentence of his commentary is likely to be the theme he and his supporters will stress during the hearing.

“Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation,” Bernanke wrote. 

Strong, yes. Nonpolitical – don’t make me laugh myself to death! Independent? Of you and me, to be sure, but not independent of Goldman, B of A, JPMorgan Chase, and the other old boys up there in the big city. This unholy alliance wants us to lie back and take the punishment they dish out when their salvation requires our sacrifice. If the congress members at the hearing on Thursday have any sense and backbone, they will not take this crap lying down. But that’s a mighty big if.

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