Ben Bernanke, person of the year
Time has named the Federal Reserve chairman its person of the year. I think this choice says a lot — perhaps not all of it as the magazine’s editors intended — about where we’ve been, where we are and where we’re going.
1. Where we’ve been: There have been a lot of factors blamed for the housing bubble, financial crisis and subsequent recession. The causes of the collapse certainly were complex, but no single factor sticks out in my mind more than the easy-money policy that the Fed pursued under Alan Greenspan — with Bernanke at his side for much of the time when trouble was brewing.
Monetary policy is a powerful way to influence the economy, probably more powerful than any spending or tax policies can be. But that potency also makes it very difficult to rein in monetary policy at the right time and to the right degree. There can be little doubt that the Fed kept flooding the world with dollars far too long after the recession induced by the bursting of the tech bubble and the 9/11 attacks. This flood is a key reason banks were willing to loan money to subprime borrowers. Securitization of mortgages played a big role here as well, but the loans that were securitized would have been less likely to have been made in the first place if money hadn’t been so cheap.
S&P’s chief economist, David Wyss, noted yesterday at the unveiling of UGA’s 2010 Economic Outlook that this recession has been more coordinated globally than any other — even the Great Depression. He talked about the interconnection of world markets, particularly financial markets, as a reason for this. This interconnection exacerbated the Fed’s policies by globalizing them.
2. Where we are: The Fed may have helped cause the housing bubble, but historians will probably rate its response to the financial crisis favorably. It was the Bush Treasury, remember, that responded so inconsistently to bank troubles (bail out Bear Stearns; let Lehman Brothers fail) as to turn a credit crunch into a full-blown financial panic. The Fed was left to overcome an even more severe credit crisis, and Bernanke was determined not to allow another depression — as the Fed had helped to do in the 1930s. Here, the Time editors are correct that our “weak economy…could have been much, much weaker” if not for the Fed’s efforts.
The Fed wasn’t perfect, but it was probably as good as we could have expected it to be.
3. Where we’re going: The satirical magazine The Onion wrote this snarky headline in July 2008: “Recession-Plagued Nation Demands New Bubble To Invest In.” And life may end up imitating satire if the Fed leaves the spigots on too long.
Commodity prices and price indexes indicate that inflation is back to normal and headed higher. There are many reasons why the current rebound is weaker than the usual post-recession rebound, but inflation expectations are surely one of them.
It sounds cruel to say this after he’s endured the last 18 months, but the real test of Ben Bernanke will be whether he has the guts to tighten monetary policy before it’s popular to do so, and while politicians howl for it to remain loose. That test will determine whether Time’s choice of Bernanke still looks good a few years from now.
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27 comments Add your comment
Jimmy62
December 16th, 2009
12:42 pm
He needs to tighten now, at least go to 1%. Money is too easy. And the problem with 0% is that you can’t go lower when/if you need to, you’re already at the bottom.
I suppose Bernanke is doing as well as Paulson, but he keeps reacting to things as if this were just like 1929, but it’s not, and needs different responses than what should have been done (but wasn’t) in 1933.
Davo
December 16th, 2009
12:46 pm
“Give me control of a nation’s money and I care not who makes it’s laws” — Mayer Amschel Bauer Rothschild
Ron Paul Reacts to Bernanke as Time Person of the Year ~ Morning Joe 12-16-09
http://www.youtube.com/watch?v=P9xRjBb61hc&feature=player_embedded#
Churchill's MOM
December 16th, 2009
12:51 pm
Wingboy,, George Schultz was on PBS last night and he is my type economist, his opinion is that we should have let those banks that need to fail… FAIL.. There is no way of calculating the cost of the mishaps that the CONSERVATIVE Bush Administration made in its last days. The Henry Paulson was allowed to even some old wall street scores on the back of the taxpayer. Right now loan demand is way down because big companies have generated cash by cutting inventory and receivables but come spring when things pick up Bernanke will have to order new presses to print enough money and interest rates will make Carter look good. On the bright side both of our slime ball Senators voted for TARP.
I would really like you to write about the Georgia House Speaker race. Here is a good place for you to start.
http://www.peachpundit.com/2009/12/15/letter-from-larry-oneal/#comments
Hillbilly Deluxe
December 16th, 2009
12:57 pm
This flood is a key reason banks were willing to loan money to subprime borrowers.
Another factor was that the people making those loans got to keep their commissions whether the loan defaulted or not. It was all about short term greed.
If Ben Bernanke is the Man of the Year, I’m an astronaut/brain surgeon.
Churchill's MOM
December 16th, 2009
1:20 pm
Link to Paul Solman, George Schultz, we need a man like him, running our economic policy..
http://video.pbs.org/video/1359947843/chapter/6/
Kyle Wingfield
December 16th, 2009
1:39 pm
Church’s, I agree that failure is a necessary element of a free market. At the same time, we can’t ignore that government had insinuated itself so deeply into the financial sector that there wasn’t really a free — in the open, independent, classical-liberal sense — market operating. The idea that this was a problem of deregulation is false. This was a problem of Big Government operating all too closely with Big Finance.
These banks had every reason to believe that they would be bailed out if they messed up, and they built their businesses accordingly. That’s not an excuse for the bankers, but rather an explanation of why I believe it would have been catastrophic to let the banks fail — **given the circumstances and arrangements under which they had been operating.** Government and banks had built an edifice that, had it fallen, would have created a catastrophe.
All that said, the approach we ought to take is to methodically and permanently take apart that edifice, now that conditions have calmed. That means making sure banks know that they (shareholders, bondholders, management, employees, clients and customers) alone will pay for the risks they take. How do we get to that point? Good question. But if government is going to use its power to “fix” the financial sector, it needs to focus on reintroducing private risk and eliminating the bad incentives that government itself created.
ohmy
December 16th, 2009
2:22 pm
the government, so far, has only artificially propped up the banking system with TARP. They haven’t tried to regulate it at all.
Jess
December 16th, 2009
2:23 pm
I guess all of the attention Bernanke is getting is the reason Congress and the administration want to trim his wings, and put greater regulations on him. Obama is definately an “all eyes on me” kind of guy, so I think this Time award may mark the beginning of trouble for Mr. Bernanke. Obama don’t share the stage wid nobody.
On tightening monetary policy, I think this will help a large section of our economy which has been ignored. The number of retirees in this country is large and getting larger. Most of these people have some savings to augment their pensions and social security, and many of these people have this money in cash investments; CDs, money markets, etc. With rates near or below 1% there is a hugh amount of buying power erased from our economy. While this number is not as great as the working population, it never the less, must be putting some drag on the economic recovery.
Churchill's MOM
December 16th, 2009
2:30 pm
Wingboy.. take the time to watch the Schultz interview, You will learn a lot. Did you take any upper level Economics or Finance classes over there at Grady? If I were in charge of Grady I’d offer a degree in business writing, which that would include a good basket of business courses.
Tyler Durden
December 16th, 2009
2:32 pm
Along the lines of ‘equal time’, I actually agree with much of Kyle’s assessment here. To give credit where credit is due: this is NOT the usual ditto-esque support of the GOP talking points, and I can truly appreciate such candor and balance from someone who usually supports the Right.
Kudos! Keep using this type of approach and you will be seen as a welcome respite from the vast majority of your mainstream colleagues.
Kyle Wingfield
December 16th, 2009
2:35 pm
I’ll watch the interview when I have a free moment. No upper-level classes, but my publication management degree essentially required that I get a minor in business (the Terry College doesn’t offer a minor, or didn’t when I was there). I think Grady might offer more business-writing classes/courses of study, if not a full-blown major, but again I’m not sure.
BS Aplenty
December 16th, 2009
2:55 pm
Kyle, your “post” comments are an excellent synopsis of the primary structural problem in the banking and mortgage industries – too much federal and state government involvement in both. I have long supported Milton Friedman’s approach to deposit guarantees in the banking industry.
Friedman argued that IF individuals want to hold government guaranteed deposits, then the “bank” should only be allowed to invest in U.S. Treasury and Agency securities. Period. This system takes the FDIC, OCC, Federal Reserve and state agencies out of the asset classification process. It’s clear from comments from FDIC’s Bair and others that the regulators were incompetent in, not only assessing asset risk, but taking steps to mitigate it.
This is a job for the free market. With the government effectively out of the business of classifying assets (loans), then the bankers will look carefully at who they lend to. The result, unfortunately, is that there may be fewer opportunities for higher risk companies to borrow without that FDIC/NCUA, etc. deposit guarantee. But, at a minimum, it reinstitutes the free-market in the banking world.
Do I think it will happen. Unlikely. Would it provide for clearer lines of responsibility. Certainly.
Ta
lmno
December 16th, 2009
2:58 pm
Every year people moan about who Time selected as person of the year. And they point out that person’s short comings. The thing is, Time doesn’t name the Person because they like them, or agree wiith them. They just name the person “For better or worse has done the most to influence…”
So, if you want to argue whether or not someone else had more influence, fine. But don’t say “So and So didn’t deserve it because they are a jerk…” or whatever.
JF McNamara
December 16th, 2009
3:01 pm
This is a pretty neutral presentation of fact. Nice job. I figured it would be an article whipping Ben for doing whatever he could to avert armegeddon. People seem to have forgotten how dire things were at one time and now want to criticize him for his actions.
Tightening is the chic thing to want, but there is virtually no one who benefits. Big business is selling like gangbusters overseas because of the weak dollar, and they don’t want to rely on the over extended American consumer. The politicians don’t want it because they don’t want to be in office if it causes a recession.
We’ll see what he’s made of in the back half of 2010. He’s not going to be able to make a move until after the elections.
BS Aplenty
December 16th, 2009
3:01 pm
That ending “Ta” was simply the detritus of an incompletely destroyed sentence. It was not a “Ta” in the sense of “Ta-ta” or “Tah-tahs” or some other reference.
There. Did I adequately explain the inconsequential?
ohmy
December 16th, 2009
3:12 pm
ta is thanks in aussie…cheers mate. blogs exist for the anonymous to be vehemently inconsequential…
sam
December 16th, 2009
4:07 pm
much better kyle..
David Axelfraud
December 16th, 2009
4:23 pm
Churchill’s MOM, still waiting on that law degree evidence you claim to have!
Kyle Wingfield
December 16th, 2009
4:26 pm
Axelfraud: We’re not going down this path any more.
Peter
December 16th, 2009
4:41 pm
Kyle…there is a very interesting article about so many different countries going under or close to it because of debt on Yahoo………
I wonder about the money the US had loaned out after the second world war……there have been so many countries we have helped…….has the debt owed to the US been paid back ?
Sunshine and Thunder
December 16th, 2009
4:41 pm
Kyle,
Those of us in the investment business came to know it as the “Greenspan put”. In other words, if we messed up too badly we could always put our problem back to Alan and he would save us. That isn’t capitalism that is high reward / low risk. The Fed gaveth and the Fed tooketh and now we are in a hole.
Hard Right Hook
December 16th, 2009
4:44 pm
Anybody know if Bernanke paid his taxes?
Chris Broe
December 16th, 2009
4:55 pm
What is astonishing to me is how our economy could have sustained such a near collapse with all the free advice available from all the economic wizards that populate the blogosphere like the ghosts of monetary collapses past. I thought I recognized J.P.Morgan, himself! Was that Keynes or piece of undigested bologna?
I knew Greenspan was full of it. What was I thinking reading his book?
It’s obvious what happened to the global economy. A boom/bust cycle was aggravated when a Macy’s one day sale collided with a Kmart blue light special. The economy was saved when they reinstituted the lay-away plan and added the Junior Whopper to the dollar menu.
Want fries with that?
Jklol
David Axelfraud
December 16th, 2009
5:26 pm
Kyle Wingfield, why not?
Ragnar Danneskjöld
December 16th, 2009
6:10 pm
Dear Kyle, I am with you on apportioning responsibility for the housing bubble: I assign 50% to the Fed for the obscene easy money policy from 2003-2005, 40% to those Congressmen who so diligently protected FNMA, FHLMC, and FHA from market discipline (can you believe they put taxpayers on the hook for $700,000 individual mortgages?), and 10% to all responsible for making the Community Reinvestment Act the law of the land.
CRA was the regulator prod for banks to make loans to people otherwise unqualified for loans. The Congressional path out of the CRA thicket was to make taxpayer-guaranteed loans. The Fed’s easy money policy ensured only commodities would bear any reward for risk, and that made real estate – a quasi-commodity – the vehicle of choice.
However, that is all last year’s news, not that Time is ever ahead of the curve on anything economic. If Time really wanted to ding someone for the current and coming economic disasters, they would focus on whoever destroyed the economy by proclaiming an end to the “Bush tax cuts.” Or to whoever thought tremendously large new taxes via “Cap and Trade” and “mandatory unfunded healthcare requirements” would make employers think they needed to increase the number of people in their organizations. Or to anyone who thought the Obama stimulus would turn out differently from the FDR stimulus or the Carter stimulus, or even the piddling little Bush 2008 stimulus. Just as Time has cited Hitler, Stalin, and Khomeni as its men of the year, a generic award to Keynesian economists would have been well-placed. Maybe we can look at Bernanke as the symbol of their ilk; I think I would have cited Geithner.
David Axelfraud
December 16th, 2009
6:49 pm
Kyle, I gotta say, you have a lot more tolerance for name calling etc. than Cynthia and Bookman. Those two ban right wing bloggers on a daily basis all while ignoring left wing bloggers.
retiredds
December 17th, 2009
11:38 am
Kyle, many times I have disagreed with you but I think you have presented a balanced view of Bernanke and the Federal Reserve’s role in managing (and at times mis-managing) the nations money supply. I would like to make a couple of observations: 1) Under no circumstances should we let the Congress have ANY control over the money supply. The Fed needs to remain independent of the avarice of Congress. 2) Those who want Bernanke out demonstrate their ignorance of the past 18 months. They are just looking for a scape goat when they (the Congress) is equally at fault for the financial debacle that ensued after the borrow and spend binge the country was on for the last 20 years. 3) Turning around the U.S. economy is like turning around a mega-tanker or slowing down and stopping a fully loaded 150-car freight train. It takes many miles. To turn around and have a healthy economy again will take years. And it will take the Federal Reserve, the Treasury, and the Congress working together (I have little hope for the last mentioned) to accomplish that feat.