Continuation from this thread:
After these conversations I sent him the standard “depression of 1920 vindicates capitalism” argument in my own words. It was probably a 5 page paper I emailed him with facts and figures. It seemed pretty irrefutable. His response: an atlantic article titled The Hero: ben bernanke saved the global economy. So why does everyone hate him? (see below)
I will BOLD quotes from the article by Lowenstein and ask my questions in regular text.
I read over the article, and it delves into some things I, admittedly, do not have vast knowledge on. These include the previous two federal reserve banks. the article states
“The first, organized by Congress in 1791, was allowed to expire after 20 years, leaving the young republic with only a patchwork system of weaker state banks. During the War of 1812, Congress realized its error (in the absence of a central bank, inflation had run rampant), and in 1816, it chartered a second bank, again for 20 years. The Second Bank of the United States was, in the main, a success. Its notes were circulated as currency, and it astutely managed their supply so as to keep the economy humming. Alas, President Andrew Jackson, a fierce opponent of both paper money and national banks, campaigned in 1832 against renewal of the charter, and indirectly against the bank’s brilliant but impetuous head, Nicholas Biddle. Resentment against financiers was running high, and the election became a referendum on the genteel Philadelphia banker versus the rough-hewn war hero—and a referendum on the bank itself. Jackson won, and the Second Bank was, per his promise, destroyed. The U.S. economy promptly plunged into a severe depression.”
DId the economy, in fact, go into depression after the bank was dissolved? And if so, was this simply the bursting of a bubble created by the second central bank of the US?
it goes on: “Over the past four and a half years, Bernanke, 58, has presided over the most sustained period of crisis of any civilian official in recent history, with the fate of millions of unemployed and underemployed Americans hanging in the balance.”
seems like this would count against him, but if it does, couldn’t the same argument be used against us that it was poorly regulated capitalism that caused it and he just had to deal with it. I know that the data does not support this, nor does logic, but in a quick debate, it seems it would be hard to shield against that response.
the article: “Only recently has the economy begun to show signs that the recovery is gaining steam. Since August 2007, Bernanke has deployed the Fed as the lender of last resort to the banking system and worked overtime to furnish an “elastic currency”—that is, to keep enough money in circulation for the economy to function. These were the very tasks that the founders of the Fed envisioned. Bernanke has performed them by tripling the size of the Fed’s balance sheet—to an eye-popping $2.9 trillion—and by inventing a welter of new programs to lend to banks and other private-sector institutions. For most of the Fed’s history, popular opinion—being generally opposed to depressions—has favored such efforts, but today the public’s disgust with government, and with banks, has cast a shadow of suspicion upon Bernanke.”
‘Last resort’? Really…?
"During the financial crisis of 2007–09, he bailed out a handful of large banks and devised a series of innovative lending operations to disperse credit to banks, small businesses, and consumers (virtually all of these loans have been repaid at a profit to taxpayers). He also lowered short-term interest rates to nearly zero and made private banks run a gantlet of stress tests to ensure some minimal level of solvency going forward."
Is this even superficially true? I know that the government can manipulate all sorts of data with all kinds of unconventional accounting practices. Is this the case here?
“This second phase has been, if anything, more controversial than the first. Its success is much harder to measure (we have no way of knowing whether the economy’s improvement would have been less robust, and how much so, without Bernanke’s efforts).”
Seems like an argument from ignorance. You could make the flip-side argument that because of this uncertainty, how could you say it’s impossible he hasn’t hurt the economy?
“Texas Governor Rick Perry said in August that Bernanke, who steered the economy out of its worst slump since the Great Depression, was ‘almost treacherous—or treasonous in my opinion.’…Newt Gingrich called Bernanke “the most inflationary, dangerous” Fed chairman “in history.”…Mitt Romney, who had previously praised Bernanke for doing a good job, promised in September that if elected he would replace him, as did Herman Cain (Bernanke’s term expires in 2014).”
So far roger has only mentioned bachman, Gingrich, Cain, Romney and Perry as the main attackers on Bernanke, plus Paul, which is the only candidate that makes sense to quote (and maybe Cain) given Paul’s knowledge and background, and Cain’s having been the Dallas Fed Chairmen. I guess it makes sense to show the “views” of the next person who may become president. But, it seems like he’s setting up a fight that isn’t really very fair or well represented. I guess he is just looking out for the nominees for GOP.
“(Gingriche’s statement is) remarkable…given that during Bernanke’s tenure, inflation as measured by the Consumer Price Index has averaged 2.4 percent, lower than that under any other Fed chief since the Vietnam War.”
Again, are these numbers just a lag in inflation that we will see and feel soon?
“Though Bernanke is a Republican, Republicans in Congress have conducted a sustained war against him, threatening to audit the Fed’s interest-rate moves; accusing Bernanke of cover-ups; refusing to fill two vacancies on the Fed’s board of seven governors, the body that Bernanke chairs; and protesting his policy briefs on mortgage reform. Last September, when Bernanke was planning to launch his latest stratagem for spurring the economy, known as Operation Twist, the Republican House and Senate leadership publicly called on Bernanke to desist—a rare attempt by Congress to meddle directly in monetary policy. Bernanke defied them.”
Seems like this just goes to show how rogue and dictator-like this guy is. Of course there are no regulators on the regulators, but even the regulators can’t regulate. I would hope this exposes Ben’s arrogance. Also, My friend claims the Fed has been audited. I know it has not in any detailed way. What might he be referring to?
it goes on…
“At the time, inflation was trending down toward 1 percent, worryingly close to the negative territory known as deflation. One reason the Great Depression lasted so long is that prices kept falling, year after year. A primary aim of Bernanke’s new program was to ward off deflation, which it did. But this success has not been nearly enough to satisfy Bernanke’s critics on the left—who have been pushing the Fed chief to initiate (within some limits) the very inflation that those on the right fear.”
I have never understood the argument that deflation and price decline is really ever a bad thing. Perhaps it’s good my mind doesn’t work that way but I would like to understand the rational, however poor it may be. Keep your enemies close kind of thing. Anyway, because I dont understand their argument, I can’t really tell them why they are wrong, or I cant tell them in any different way than I already have. This is a particular point i want a lot of clarification on because my friend was so adamant that deflation is also a terrible thing.
“In December, he felt compelled to release a letter to Senate leaders in which he distinguished Federal Reserve loans, which have not cost the taxpayers anything or added to the federal deficit, from “government spending”—a simple point, perhaps, but one that is often confused in the public discourse.”
please explain “how could it not in any real sense?”
“the Fed chief urged me to pick up a copy of Lombard Street, a seminal book on central banking written by Walter Bagehot, the 19th-century British essayist. “It’s beautiful,” Bernanke said of the book—obviously appreciating that Bagehot had urged central bankers to take vigorous action to forestall panics.”
anyone read it?
“Bernanke has been an ineffective lobbyist for agendas beyond the Fed’s purview, such as long-term deficit reduction or mortgage reform. Nor has he exploited the natural leadership role of the Fed chairman on the world stage, for instance during the crisis in Europe.”
bullshit
““What Bernanke discovered was that it wasn’t the quantity of money, it was that the banks stopped lending,” says Stanley Fischer, formerly Bernanke’s thesis adviser at MIT and currently the governor of the Bank of Israel. “More than the decline in money, it was the collapse of credit.” The implication was that regulating banks in good times—and, if need be, rescuing them in bad—was of prime importance, something Bernanke would remember in the 2007–09 crisis.”
Collapse of credit that was never real in the first place, right?
"The particular problem of the ’30s was deflation: goods were worth less each year—or, alternatively, dollars were worth more. In a mirror image of inflation, no one would spend, because lower prices were forever just around the corner, and no one would borrow, because they would have to repay their debts with more valuable currency.The central bank cut interest rates to try to induce borrowing and spending, but then it was bereft of tried-and-true methods of stimulating the economy. Production and employment kept spiraling downward; Keynes called this a 'liquidity trap.'"
if this is the argument against deflation doesnt it beg the question: “Arent these problems also just a symptom of an unstable (fiat) currency?” and what exactly is a liquidity trap?
continuing…“But while Bernanke recognized the danger in theory, he did not anticipate the looming crash in home prices. Indeed, he argued that central banks, including the Fed, had tamed the extremes of the economic cycle.”
and who was it exactly that did see it coming? Hmm…oh yes, the austrians.
“he overlooked the fact that dicey mortgage-backed securities made up a sizable portion of the assets of the biggest banks. “Risk was concentrated in key financial intermediaries,” he told me. “It led to panics and runs. That’s what made it all so bad.” Speaking of government officials collectively, he added, “Everyone failed to appreciate that our sophisticated, hypermodern, highly hedged, derivatives-based financial system—how ultimately fragile it really was.”
And who was it exactly that made those toxic assets so appealing? Hmmm…
“These criticisms aside, if one is assigning blame, it is important to note that the bubble inflated almost entirely on Greenspan’s watch. The time to avoid a crash was when mortgages were getting written, or when banks could still sell off assets without sparking a panic; by the time Bernanke arrived, a crisis was probably inevitable.”
How are bernanke’s policies any different from greenspan’s policies when old greeny was chairmen, after he betrayed his mostly free market ideals? Greenspan largely helped perpetuate two large bubbles and bernanke is remedying them with the same policies, right?
“Brian Madigan, a former senior official at the Fed, made just that argument after the crisis, and also wrote that Bagehot’s principles “need to be interpreted and applied in the real world.” One senses that he was speaking for the chairman. With the financial system on the brink of collapse, bailouts were deemed to be the lesser of two evils.”
besides talking about the depression of 1920, which failed to ultimately convince my friend, what else can be said to refute this?
“So far, the hawks have seen inflation around every corner. So far, they have been wrong, and Bernanke has been right.”
I must admit, I thought the inflation would have hit us a while ago. What is happening there?
Bernanke even openly admitted to “…Congress in February, ‘Our nation’s tax and spending policies should increase incentives to work and save,’ but his nearly zero percent interest rate clearly discourages saving.”
So, how if he knows savings is the back bone of real credit and a strong economic atmosphere, why does he not cease his policies, and why did he enact them in the first place?
Former Fed governor Warsh seems to understand it brilliantly, “‘We have been trying to fake a housing recovery for four and a half years,’ he says, meaning that each Fed purchase elevates the market above its inherent level.”
“By this thinking, bankruptcies and foreclosures play a restorative role—returning assets to the market newly unleveraged and reasonably priced. The argument has emotional—almost religious—appeal, the downward repricing of assets being the market’s form of atoning for sin. Bernanke encountered this idea in November, when he visited military families at Fort Bliss, in El Paso. A woman asked him whether “we should be looking to get ourselves back to where we were … when it comes to how people live, buy homes, save, invest.” The chairman drew a breath and acknowledged, “That’s a very deep question.” His answer was revealing. While insisting he has no wish to return to overpriced homes and lax mortgage standards, he added, ‘I’m not a believer in the Old Testament theory of business cycles. I think that if we can help people, we need to help people.’”
Speaking of emotional appeal, Ben clearly ignores the logic of the woman’s question by replying with an emotional answer. If it’s so important to help people, why doesn’t he do it out of his own pocket. Best of both worlds i guess: helping people with other people (or the victim’s) own money.
Here he elaborates a little further: “‘There is a thesis that the only way to restore the economy is by a necessary purging of previous excesses. In disagreeing, I am not saying there are not imbalances that need to be fixed. That said, there is still scope for policy to ameliorate the effects of necessary rebalancing on the public, to help shorten the recession. A massive decline in employment slows the rebalancing and deleveraging processes rather than speeds them; people don’t have the income to pay their debts. So the argument is: where you can, you try to short-circuit the process by urging banks to take losses and modifications, and recapitalize. Obviously, you need to get bank balance sheets healthy, and individual consumers healthy—but subjecting the system to high unemployment and high rates of bankruptcy and foreclosure is a very inefficient way to get there.’”
Is this just a broken window fallacy, or is there more that I am missing?
“Bernanke is more conservative than his Republican critics imagine, but as he has stated publicly, he finds the prospect of millions remaining unemployed “unacceptable.” He is particularly worried about the many people who have been out of work for more than six months. Like FDR, he is willing to try what works, or what might work”
Is it realistic to believe that millions would have been unemployed, even for a short time, if the market had had the opportunity to fix itself? Aren’t there millions still unemployed now? Not even a case of the “unseen”. We clearly see millions are unemployed.
"His mentor, Milton Friedman, thought the business of adjusting interest rates was so tricky, it would be better to yield the job to a computer. But Bernanke thinks a human can do it. "
Was Friedman really his mentor? Didn’t Friedman admit late in life that he was wrong about the Fed and the monetarist’s theory of money and central banking?
Anyway, thats all. I do have one final question. Is there anyway to know, or are there signs that point to, when an intervened economy will simply bounce back from the intervention, as it has in all previous depressions in the US and when it will simply enter into a hyper-inflationary phase such as that of Germany’s in 1923? What I mean is, when a bubble bursts, and regulators and central bankers create a new one to make it appear they fixed the economy, at what point does the law of diminishing returns totally clauber the efforts of the central bankers? Why do we bounce back from the great depression but not from Germany’s depression in 1923. I know they bounced back, but the market appears to have had to forcefully thwart the governments efforts. I don’t know if my question is clear, but I would really like to know. At what point is fiat money inflating so quickly that it becomes totally pointless. Also, any remarks you can add to any of these questions is appreciated, but try to refrain from alluding only to the depression of 1920. He appears to find little convincing in that other than his saying “you paper was well-researched and impressive. I work 16 hours a day so I dont have time to refute it, but here is this article.” Thanks guys. Ill post my response to him that caused him to give me this article.
