Monday, December 21, 2009

Heckuva job, Ben!

Well, Henry Kissinger did win a nobel peace prize...

Time magazine on Wednesday named Federal Reserve Chairman Ben Bernanke as its 2009 Person of the Year, calling him "the most powerful nerd on the planet."

Bernanke will be featured on the cover of the magazine that hits stores Friday.

He beat out Jamaican sprinter Usain Bolt, President Obama, Apple CEO Steve Jobs and House Speaker Nancy Pelosi among other finalists.

Time said Bernanke was the reason the U.S. financial crisis wasn't worse.

"The story of the year was a weak economy that could have been much, much weaker. Thank the man who runs the Federal Reserve, our mild-mannered economic overlord," the article said.

"He didn't just reshape U.S. monetary policy; he led an effort to save the world economy."
Yep, that's just what he did. Dean Baker:
The Senate finance committee overwhelmingly voted to approve Ben Bernanke for another four-year term as Federal Reserve board chairman. This is a remarkable event since it is hard to imagine how Bernanke could have performed any worse during his last four-year term. By Bernanke's own assessment, his policies brought the US economy to the brink of another Great Depression. This sort of performance in any other job would get you fired in a second. But for the most important economic policymaker in the country it gets you high praise and another term.

There is no room for ambiguity in this story. Bernanke was at the Fed since the fall of 2002. (He had a brief stint in 2005 as chair of President Bush's council of economic advisors.) At a point when at least some economists recognised the housing bubble and began to warn of the damage that would result from its collapse, Bernanke insisted that everything was fine and that nothing should be done to rein in the bubble.

This is worth repeating. If Bernanke knew what he was doing, he should have been able to see as early as 2002 that there was a housing bubble and that its collapse would throw the economy into a recession. It was also entirely predictable that the collapse could lead to a financial crisis of the type we saw, since housing was always a highly leveraged asset, even before the flood of subprime, Alt-A and other nonsense loans that propelled the bubble to ever greater heights. Of course as the bubble expanded, and the financial sector became ever more highly leveraged, the risks to the economy increased enormously.

Through this all, Bernanke just looked the other way. The whole time he insisted that everything was just fine.

To be clear, there was plenty that the Fed could have done to deflate the bubble before it grew to such dangerous proportions. First and foremost the Fed could have used its extensive research capabilities to carefully document the evidence for a housing bubble and the risks that its collapse would pose to the economy.

It then should have used the enormous megaphone of the Fed chairman and the platform of the institution to publicise this research widely. The Fed could have ensured that every loan officer who issued a mortgage, as well as all the banks officers who set policy, clearly heard the warnings of a bubble in the housing market, backed up by reams of irrefutable research. The same warnings would have reached the ears of every potential homebuyer in the country. It's hard to believe that such warnings would have had no impact on the bubble, but it's near criminal that the Fed never tried this route.

The second tool that the Fed could have pursued was to crack down on the fraudulent loans that were being issued in massive numbers at the peak of the bubble. It is absurd to claim that the Fed didn't know about the abuses in the mortgage market. I was getting emails from all over the country telling me about loan officers filling in phony income and asset numbers so that borrowers would qualify for mortgages. If the Bernanke and his Fed colleagues did not know about these widespread abuses, it is because they deliberately avoided knowing.

Finally, the Fed could have had a policy of interest rate hikes explicitly targeted to burst the bubble. Specifically, it could have announced that it will raise rates by half a percentage point at every meeting, until house prices begin to fall and it will keep rates high until house prices approach their pre-bubble level.

This is what a responsible Fed policy would have looked like. But Ben Bernanke did not pursue a responsible Fed policy. He insisted that everything was just fine until he had to run to Congress last September, saying that if it didn't immediately give $700bn to the banks through the Tarp programme then the economy would collapse.

How on earth can you do worse in your job as Fed chair than bring the economy to the brink of a total collapse? If this is success, what does failure look like?
It's also good that he doesn't think 10% unemployment is a concern either. Man of the year!

1 comment:

  1. I should preface this by saying that I haven't finished reading the post yet, but:

    Most powerful nerd on the planet?!! BLAST! THAT WAS SUPPOSED TO BE MY JOB!
    Let's see what they say once I rearrange their genes to prevent any neuronal activity in Brodmann areas 22, 39, 40, 44, and 45.

    ... Oh wait, they won't say anything after that...



    ...I've been in the lab for too long...