Bernanke's Revolution

Inquiring minds are reading a long and glaringly misguided post by the Washington Post on How Bernanke Staged a Revolution.

Bernanke's ability to understand and synthesize the views of his colleagues goes a long way toward explaining how he has revolutionized the Federal Reserve, which under his leadership has deployed trillions of dollars to try to contain the worst economic downturn in 80 years.

Famously soft-spoken, Bernanke is an unlikely revolutionary. He is, after all, a career economics professor who lacks the charisma of a skilled politician.

Yet in the past 18 months, Bernanke has transformed that stodgy organization, invoking rarely used emergency authorities. His decision to do so has drawn criticism -- he has transcended traditional limits on the role of a central bank, stretched the Fed's legal authority and to some, usurped the responsibility of political authorities in committing vast sums of taxpayer dollars.

More than a few times over the past year, senior Fed staff members have logged into their e-mail accounts to find an unusual message. Subject: Blue Sky. Sender: Ben S. Bernanke.

The point of the e-mails has been to encourage them to think of creative ways that the Fed can guard the economy from the downdraft of a financial collapse.

This is an institution that not long ago could spend the better part of a two-day policymaking meeting deciding whether its target for short-term interest rates should be 5.25 percent or 5 percent. But in this crisis, rate cuts, the most common tool for helping the economy, have lacked their usual punch. The Fed already has dropped the rate it controls essentially to zero, meaning there is no room left to cut.

That's why Bernanke's Fed has been trying to dream up ideas out of the clear blue sky. The result has been 15 Fed lending programs, many with four-letter acronyms, most of them unthinkable before the current crisis.

"For many months, the chairman was asking 'how can we escalate?' " said William C. Dudley, president of the New York Fed. "There was a general consensus that we were getting to the point where traditional monetary policy tools might not be sufficient."

"In a crisis, the task a chairman assigns is 'Find a way to do this.' It's not a question of 'Can we do this?' " said Vincent Reinhart, who was a senior Fed staffer until 2007 and is now a resident scholar at the American Enterprise Institute.

Nowhere does the article point out that Bernanke and the Fed are responsible for this problem. Bernanke did not dissent one time with Greenspan or his policies. Bernanke was late to see every problem we now face, even to the point of frequently cheerleading right along with the housing buffoons that subprime would be contained. Of course nothing was contained. And it was the Fed's policy of bailing out banks and throwing money at every problem that led to this crisis.

Eventually, throwing money at problems stops working. Moreover, Bernanke along with Geithner want banks to increase lending, right now, when it was reckless lending and Fed sponsorship that is causing bank failures right now.

Rather than praising Bernanke for stretching legal authority, the Washington Post ought to be scared to death by it.

The Beatification of Ben Bernanke

Dean Baker gets it right in a short and sweet rebuttal of the Washington Post article in The Beatification of Ben Bernanke.

The Washington Post gave a glowingly positive account of Ben Bernanke's efforts to deal with the economic crisis. Missing from this discussion was any mention of the fact that he deserves a large part of the blame for this crisis.

Bernanke was a persistent and vigorous bubble denier, first in his capacity as a member of the Board of Governors and then on his becoming Fed chair in January of 2006. Even as the bubble began to unwind in the winter of 2007 he gave assurances that the problems would be contained in the subprime market. After he engineered the takeover of Bear Stearns in March of 2008, Bernanke told Congress that he did not see another Bear Stearns out there. Needless to say, he was surprised by the collapse of Lehman and the market's response six months later.

The media have a tendency to write glowing accounts of people in positions of power in the United States. Unfortunately, reporters often seem to believe that it is their job to promote confidence in the people in power. It isn't.

Well stated Dean. Thanks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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