Given that he was at the heart of monetary policy making before, during and after the biggest monetary disaster of all time, Ben Bernanke should be mightily pleased with the reviews he has been getting as he leaves office as Fed chairman. All but a disgruntled minority give him full marks for leading the efforts to combat the financial crisis of 2008 and the rapid onset of depression. Given the impotence of fiscal policy, monetary policy was ‘the only game in town’ – and it rose to the challenge. A few of the career obituaries criticise him – some for fuelling the bubble pre-crisis, others for taking undue risks in blowing up the Fed’s balance sheet post-crisis. Others say he should have pressed harder to strengthen the banking system post crisis – though financial system reform is inevitably a political matter. Most broadly accept his own vigorous defence of his record. Which, when you come to think of it, is pretty amazing. It means that most people broadly accept the Fed’s interpretation – that the crisis was down to causes outside the Fed’s control, such as China’s savings glut, irresponsible behaviour by the banks and/or equally irresponsible fiscal policies. The monetary policy-makers have come up smelling of roses; they are saviours of capitalism, their critics ill-informed outsiders.
There are various possible reasons for this. One is that the ‘consensus’ view is correct. I do not share this, for reasons set out in my book. In my view, the policies followed by the Fed under Bernanke have not even begun to get us out of ‘the money trap’ – the illusion that by following the right policies at the nation-state level we can each find our way individually out of the maze. Worse, the Fed, with all the intellectual weapons at its disposal, has shown a lamentable failure to inquire deeply into the underlying causes of the crisis. These will become clearer in future years – but could be diagnosed now. I see the world economy as struggling from one crisis to another, with the periods of respite getting shorter and shorter. Right now, asset prices in many asset classes and some important economies are already in bubble territory – before recovery is well-established. To my mind it is clear that there is a systemic fault in the functioning of the monetary system that repeatedly prevents full recovery from being achieved. Bernanke’s greatest sin – a sin of omission rather than commission but a grievous failure all the same – is to have failed to raise the red flag over this. The same criticism can be applied to Lord King (Mervyn King), and to the leaders of the ECB. Even if they did not pretend to have all the answers, they could and in my view should have delved more deeply into possible causes of the repeated crises over the past 40 years – and reflected what they had in common. Why didnt they?
One reason could be that central banks as institutions have done well out of the existing arrangements – the deal with governments on the one hand and the private sector on the other. The elites have cemented the ties that bind them closely together.
I am not claiming that central bankers deliberately stood by while the crisis built up in the expectation that they would gain as institutions from managing the fallout. Alan Greenspan’s insistence – followed by others – that it was better to clean up afterwards than raise rates to head off the credit boom – was sincere, not a Machiavellian act to promote central banks’ influence and status. To preserve existing arrangements was – and remains – in the interests of other powerful parties as well.
The fact is that the way the system works restricts the benefits that the world economy should and could derive from full globalisation of markets. But neither central bankers nor governments nor private bankers want to acknowledge this. Instead – and this is the way we are going – they would rather restrict globalisation, impose controls at domestic and international levels and preserve their power. The crisis has shown how the community’s efforts to exploit the globalisation potential comes up against the limits set by national elites linked indissolubly to national mandates and national (or regional) centres of money creation – as well as national lenders of last resort to banks. Existing power relations suit national governments and private bankers. They would prefer to restrict markets and individual freedoms than give up their benefits. This is where they link hands with critics on the left who always distrusted markets.
The private sector will be highly reluctant to criticise the central banks – least of all, when central banks have acquired new powers to regulate and, at the extreme, to close down any financial institution. Any criticism – other than purely technical discussions of monetary policy tactics – will be subject to strict censorship by bank boards. In future, it will be even more absurd for a commercial bank to risk offending people with such power. Reasonable criticism will be allowed – indeed, encouraged to show how liberal we all are – but nothing that actually upsets or annoys senior central bankers can be permitted. Why risk it?
Remember one dominant feature of central banking culture. Central bankers are intensely loyal to one another. That gives them enormous global public relations influence. It means that international conflicts over monetary matters must all be channeled through governmental channels. Central bankers must always praise each other. I cannot recall a single instance of one central banker criticising another in public. On the contrary, they do not let an opportunity go by without lavishing praise of each other.
They have enormous patronage over research in economics. Scholars who wish to be taken note of by the powers that be will take great care in the types of criticism they make. This is only human. Meanwhile, investment/commercial bankers sponsor research only from “respectable” scholars who pass the central banking litmus test.
Thus there is little serious questioning of the inflation targeting/flexible exchange rates model or claims that it has been the most successful monetary policy paradigm ever. There is wide praise for forward guidance, a last-ditch attempt to preserve the old model. (There is equally wide praise now it is being dropped). Isn’t it astonishing that there is still so little consideration of alternative policy models? The Austrian model – which actually provided a far better account of what has happened than the establishment view – is mentioned only to be dismissed. Central bankers’ speeches cite a restricted list of ‘approved’ authorities. Conferences are love-ins. There is little awareness that we remain poised on the edge of disaster. Or if they are aware, they keep mum.
Before the crisis, Bernanke and a few other leaders did float the idea that there might be a connection between failings of the international monetary system and the build up of domestic imbalances. This was the moment when they could have stepped back and considered how the lack of discipline on all actors was being abused. They might have called attention to the risks posed by floating exchange rates – and in particular the way such rates transmit inflationary (or deflationary) impulses across borders. They did discuss the functioning of the system – but it turned out to be another excuse for pointing the finger at others, rather than for genuine education of the public. It started a wholly misleading and intensely damaging spell of China-bashing (references in the book). China was portrayed as bent on the destruction of America’s balance sheet (and indirectly the world economy), by saving too much – more than Anglo-Saxon economists thought was decent. America’s unparalleled fiscal profligacy was scarcely mentioned, nor how the monetary system enabled it – and others – to indulge their appetites.
Was anyone in the world in a better place to initiate R&D on a better architecture for the system than Ben Bernanke?
Why weren’t more questions asked about derivatives? Bernanke joined the Board of Governors of the Fed in 2002. Warren Buffett referred to derivatives as “financial weapons of mass destruction” in early 2003. The Fed had supervisory responsibilities. This is one instance where the dominance of the economist’s mindset among central bankers made them blind to financial market developments of potential great significance.
This failure to take a wide historically-informed analysis, the inability to discern the key patterns in passing events, or to lift the debate above the defensive and narrow terms in which it has been conducted, is the true missed opportunity of the Bernanke years.
Bernanke’s lost opportunity
Nobody was better placed to do R & D on a better system; more's the pity he blew it
Given that he was at the heart of monetary policy making before, during and after the biggest monetary disaster of all time, Ben Bernanke should be mightily pleased with the reviews he has been getting as he leaves office as Fed chairman. All but a disgruntled minority give him full marks for leading the efforts to combat the financial crisis of 2008 and the rapid onset of depression. Given the impotence of fiscal policy, monetary policy was ‘the only game in town’ – and it rose to the challenge. A few of the career obituaries criticise him – some for fuelling the bubble pre-crisis, others for taking undue risks in blowing up the Fed’s balance sheet post-crisis. Others say he should have pressed harder to strengthen the banking system post crisis – though financial system reform is inevitably a political matter. Most broadly accept his own vigorous defence of his record. Which, when you come to think of it, is pretty amazing. It means that most people broadly accept the Fed’s interpretation – that the crisis was down to causes outside the Fed’s control, such as China’s savings glut, irresponsible behaviour by the banks and/or equally irresponsible fiscal policies. The monetary policy-makers have come up smelling of roses; they are saviours of capitalism, their critics ill-informed outsiders.
There are various possible reasons for this. One is that the ‘consensus’ view is correct. I do not share this, for reasons set out in my book. In my view, the policies followed by the Fed under Bernanke have not even begun to get us out of ‘the money trap’ – the illusion that by following the right policies at the nation-state level we can each find our way individually out of the maze. Worse, the Fed, with all the intellectual weapons at its disposal, has shown a lamentable failure to inquire deeply into the underlying causes of the crisis. These will become clearer in future years – but could be diagnosed now. I see the world economy as struggling from one crisis to another, with the periods of respite getting shorter and shorter. Right now, asset prices in many asset classes and some important economies are already in bubble territory – before recovery is well-established. To my mind it is clear that there is a systemic fault in the functioning of the monetary system that repeatedly prevents full recovery from being achieved. Bernanke’s greatest sin – a sin of omission rather than commission but a grievous failure all the same – is to have failed to raise the red flag over this. The same criticism can be applied to Lord King (Mervyn King), and to the leaders of the ECB. Even if they did not pretend to have all the answers, they could and in my view should have delved more deeply into possible causes of the repeated crises over the past 40 years – and reflected what they had in common. Why didnt they?
One reason could be that central banks as institutions have done well out of the existing arrangements – the deal with governments on the one hand and the private sector on the other. The elites have cemented the ties that bind them closely together.
I am not claiming that central bankers deliberately stood by while the crisis built up in the expectation that they would gain as institutions from managing the fallout. Alan Greenspan’s insistence – followed by others – that it was better to clean up afterwards than raise rates to head off the credit boom – was sincere, not a Machiavellian act to promote central banks’ influence and status. To preserve existing arrangements was – and remains – in the interests of other powerful parties as well.
The fact is that the way the system works restricts the benefits that the world economy should and could derive from full globalisation of markets. But neither central bankers nor governments nor private bankers want to acknowledge this. Instead – and this is the way we are going – they would rather restrict globalisation, impose controls at domestic and international levels and preserve their power. The crisis has shown how the community’s efforts to exploit the globalisation potential comes up against the limits set by national elites linked indissolubly to national mandates and national (or regional) centres of money creation – as well as national lenders of last resort to banks. Existing power relations suit national governments and private bankers. They would prefer to restrict markets and individual freedoms than give up their benefits. This is where they link hands with critics on the left who always distrusted markets.
The private sector will be highly reluctant to criticise the central banks – least of all, when central banks have acquired new powers to regulate and, at the extreme, to close down any financial institution. Any criticism – other than purely technical discussions of monetary policy tactics – will be subject to strict censorship by bank boards. In future, it will be even more absurd for a commercial bank to risk offending people with such power. Reasonable criticism will be allowed – indeed, encouraged to show how liberal we all are – but nothing that actually upsets or annoys senior central bankers can be permitted. Why risk it?
Remember one dominant feature of central banking culture. Central bankers are intensely loyal to one another. That gives them enormous global public relations influence. It means that international conflicts over monetary matters must all be channeled through governmental channels. Central bankers must always praise each other. I cannot recall a single instance of one central banker criticising another in public. On the contrary, they do not let an opportunity go by without lavishing praise of each other.
They have enormous patronage over research in economics. Scholars who wish to be taken note of by the powers that be will take great care in the types of criticism they make. This is only human. Meanwhile, investment/commercial bankers sponsor research only from “respectable” scholars who pass the central banking litmus test.
Thus there is little serious questioning of the inflation targeting/flexible exchange rates model or claims that it has been the most successful monetary policy paradigm ever. There is wide praise for forward guidance, a last-ditch attempt to preserve the old model. (There is equally wide praise now it is being dropped). Isn’t it astonishing that there is still so little consideration of alternative policy models? The Austrian model – which actually provided a far better account of what has happened than the establishment view – is mentioned only to be dismissed. Central bankers’ speeches cite a restricted list of ‘approved’ authorities. Conferences are love-ins. There is little awareness that we remain poised on the edge of disaster. Or if they are aware, they keep mum.
Before the crisis, Bernanke and a few other leaders did float the idea that there might be a connection between failings of the international monetary system and the build up of domestic imbalances. This was the moment when they could have stepped back and considered how the lack of discipline on all actors was being abused. They might have called attention to the risks posed by floating exchange rates – and in particular the way such rates transmit inflationary (or deflationary) impulses across borders. They did discuss the functioning of the system – but it turned out to be another excuse for pointing the finger at others, rather than for genuine education of the public. It started a wholly misleading and intensely damaging spell of China-bashing (references in the book). China was portrayed as bent on the destruction of America’s balance sheet (and indirectly the world economy), by saving too much – more than Anglo-Saxon economists thought was decent. America’s unparalleled fiscal profligacy was scarcely mentioned, nor how the monetary system enabled it – and others – to indulge their appetites.
Was anyone in the world in a better place to initiate R&D on a better architecture for the system than Ben Bernanke?
Why weren’t more questions asked about derivatives? Bernanke joined the Board of Governors of the Fed in 2002. Warren Buffett referred to derivatives as “financial weapons of mass destruction” in early 2003. The Fed had supervisory responsibilities. This is one instance where the dominance of the economist’s mindset among central bankers made them blind to financial market developments of potential great significance.
This failure to take a wide historically-informed analysis, the inability to discern the key patterns in passing events, or to lift the debate above the defensive and narrow terms in which it has been conducted, is the true missed opportunity of the Bernanke years.
Written on January 26, 2014 at 9:28 pm, by robert
Categories: Homepage, News and Comment, Official Money, RP's Diary | Tags: Ben Bernanke, central banking, financial crisis, G20, global financial system