The Education of Ben Bernanke

Here is a long NYT piece on the Bernanke regime; here is Anna Schwartz complaining about Bernanke as Fed chair.  In the comments, I am taking nominations for the following: given perfect hindsight, what should the Fed have done and when?  Keep two things in mind: a) looser money sooner probably would not have helped the credit problems (and might have tied the Fed’s hands later on), and b) your recommendations cannot refer to actions which predate the Bernanke regime.


There wasn't a whole lot Bernanke could have done differently to prevent/help the situation, Greenspan set the stage quite well for this bubble. Playing hardball and letting the economy do what it would would have lead to a harder crash, but one that likely would have been recovered from faster. So the moral of the story is, remember your Austrians, we know what we're talking about.

I can't believe what I am about to say (must be my evil twin brother) but I agree that by the time Bernanke came on the scene it was too late, even supposing increased liquidity could address the problem of bad paper and lost confidence. Haircuts for everybody sooner rather then later.

I'd be interested to hear how Bernanke could bring the price of gold down to $400.

I'm with Larry Redden, basically.

But I think Bernanke might have been more insistent that the elected branches of government become more active, rather than try to make the few instruments available to the fed do the heavy lifting.

Really, they've done squat. Paulsen tried to organize a fund to deal with the SIV issue, but that's gone nowhere. Paulsen also arranged for some personal loan relief (discussed extensively elsewhere on this blog), which also looks like window dressing. So Paulsen has done ineffective things; others have done little or nothing.

I console myself with the fact that having congress and the executive branch do nothing might, indeed, be better than what they'd do if they did something.

I think most can agree that there was practically nothing Bernanke could have done to stop it. If anything, he could have raised rates quicker or told Greenspan to raise rates quicker during his nomination process and then around the beginning of 2007 he could have begun making the cuts that didn't actually come until July. I don't know if he should have raised them any higher than 5.25, but they weren't kept that high that long IRL. He might have taken them to 5.75 and in August or September of 2006 and then began cutting in March of 2007 when it began to become clear how big of a problem it was going to be.

I have to disagree with wintercow20,

The best thing the country can do is get rid of the Fed entirely and this proposition creates yet another company who's accountability will be limited. Yes your proposal puts that last caveat for the ability to scrutinize them, but over time, just like the Fed has, they will report less and less and then all of a sudden, no one knows who really owns this property. To solve that crises, sweeping new reforms will take place and all of a sudden, say goodbye to public property. For those stunned by the statement on the existence of the Fed, yes I am in support of hard currency, and no I don't think we should revert to the gold standard. Competing currencies baby. The dollar's in its death throws. Let it die but legalize life boats.

For something different, the Greenspan Fed ought not have raised rates in 2004-5 on a stately 25bp
per meeting basis, but done so more precipitously and less predictably. Making policy too transparent
lowered risk premia and increased liquidity to an undue extent, creating a chase for yield and tolerance
of leverage. All this money seeking yield had to go somewhere, and the nonagency mortgage market was
ready to take it.

oops, that violated the rules of the game. Mea culpa.

I'm going to pile on the bandwagon and say Bernanke couldn't have done much differently. I do wish there had been a little more oversight of all the real estate lending over the last few years, although I know it doesn't exactly answer your question. There have clearly been lots of abuses on the parts of borrowers and lenders, not just the usual irrational exuberance.

At this point, I think the Jim Cramers of the US are going overboard in calling for a stronger Fed response. The government might want to push harder for an earlier and clearer disclosure by banks of how bad the damage is to restore trust in the system, but easing rates doesn't seem like it'll do much. A measured approach makes sense. People need to take their lumps to some extent after making stupid business decisions. The government might be able to cushion the blow on the rest of the economy with a stimulus package, but I think if too many people escape unscathed this time, we'll just be back here in another 3-5 years. Moral hazard, etc.

Pretty obviously, if you screw up information input, you get terrible output. By jerry-rigging inflation statistics, noticeably about the inflation of housing prices but also about the service sector in general, the Fed was able to justify a low interest regime that would have been unacceptable if they had to justify it in the face of clear inflationary signals, which were sounding years ago.

If you screw up the machinery, the machine isn't going to work.

Simple. It should have announced that we were in the midst of a Hayekian, Fed-induced artificial boom and bust cycle. It should have explained what a Hayekian boom bust cycle is (maybe hiring Roger Garrison at Auburn U. to help them with that). And it should have announced that it was returning to a non-inflationary, neutral money regime, and it was renouncing an understanding of "inflation" and "deflation" which fails to take into account productivity growth in its theoretical conception of these notions.

Simply put, it should have re-ordered Fed policy to comport with a micro-economically sound macroeconomics, as has been developed by Friedrich Hayek (and by no other contemporary "mainstream" economist).

I wholeheartedly agree with Larry. Get rid of the Fed. Don't play with the money-supply. Period. If you want free-markets elsewhere; have money on the free-market too.

Whatever the economic wonks may tell us deep down nobody, not even Greeenspan, has any clue as to what works and what doesn't. These are only dangerous experiments with money. Earlier they stop the better.

He should have tried to dissolve the Fed and institute a free-banking regime.


Long time fans of the Fed know that Bernanke played a good game. But we still have to listen to pontificators spout off about his vacation to Cabo with Jessica Simpson, as if that has anything to do with why the economy is in the tank. It'll pass...

ZBicyclist said:

I'd be interested to hear how Bernanke could bring the price of gold down to $400.

try this,

Bernanke was sworn in Fef 1 2006. If you assume that he come instantly to speed and can act starting from that time....

Take a look at the Calculated Risk blog at the time. It was clear that the housing bubble was about to burst....but it didn't for 18 months.

During those 18 months the mortgage biz went on a frantic campaign to keep the numbers looking good. They gave a mortgage or a refi to anyone who passed the "clouded mirror" test.

If the fed, which is charged with keeping an eye on this stuff, had stepped in, who knows what would have happened.

I understand that in the real world no one takes over an institution like the fed and turns it around from the previous rose tinted glasses regime in just a few months, but there was still time when Bernanke came on board.


Investors wouldn't have reached for yield if the Fed had raised rates.

I agree Ben was (and still is) in a no win scenario.

If only there was some way to rationally set short term rates besides a periodic meeting of benevolent experts. Some economist will probably figure out how to do that someday.

By the time Bernanke became chairman, most of the damage had already been done. The bubble and the bad lending that accompanied it was obvious to anyone who cared to look, especially if they paid some attention to the incentives facing the actors in the play. Bernanke should have paid more attention to the horror stories at Calculated Risk and other web sites, or just taken a gander at price-to-rent ratios.

The NY Times piece notes that Bernanke was one of the people who was concerned in the early 2000's about the possibility of deflation. I remember the panic this seemed to induce at the Fed, a panic that was completely uncalled for. Mild deflation is far less dangerous than people were making it out to be. The U.S. became a world power largely due to the tremendous post-Civil War growth, and during many of those years prices were going down. Economists seem to have forgotten that Milton Friedman wrote a paper on the optimum quantity of money that concluded the right amount of money growth was the amount that yielded a deflation rate equal to productivity growth, essentially holding nominal wages constant. A small amount of deflation, in Friedman's view, was not a bad thing. Big deflations caused by tight money are bad, small ones caused by increasing productivity are not.

No, that is not what will happen.
The Fed buys and sells from its portfolio all the time without making the market panic.

Russ, do you suggest that higher supply does not cause costs to fall?

Factored into the cost of the Bond is the risk of variation in the exchange rate during the period that you owen the asset.

Under a gold standard that variation is minimized because the object of monetary policy is to stabilize the unit of account.

The drop in the cost of the Bond,caused by a increase in the supply of Bonds would be offset by the increase in the demand for money that a gold standard would bring.

Overall,interest rates would drop if the uncertainty in the unit of account was removed.

I think it is very difficult to determine what Bernanke should or shouldn't have done because we don't know about all the forces he has had to deal with..for example the U.S is a large debtor nation and many speculate that the way Bernanke has moved to protect Bondholder's (INC. CHINA) and insure they get full value (par) on FRAUDULENT DEBT that was OVERPRICED at inception... i.e suprime/ alt. a mortgages packaged as security's during the housing boom in order to ensure they keep buying our treasury debt. He also try's to play mind games i.e confidence games with future expectation's ...i.e recovery and non-deflation . This leads poor ben to constantly making a fool of himself...i.e "we believe the subprime market will be contained LOL "........"we believe the financial institutions are sound" blah blah..... because of these tasks (guiding future perceptions/expectations)YOU can't take ANYTHING he says at face value.....gee that builds confidence.........

Also is he trying to restart the securitization market (that collapsed and gained steam under his watch 2006, 2007, 2008) which was unsustainable........but what was ben really to do ....this princeton professor....was he gonna speak up and tell the big boys on wall street that he was gonna kill their cash! .....he's a regulator like ....the SEC is a regulator............TOOTHLESS Tool. Everyone knew ben's modus operandi from his speeches....shower taxpayer funds to wall street to avoid a deflation....never mind if the collapse was inevitable from deregulation, FRAUD, and leverage.......ya ben the wall street/gov't revolving door was happy to put you and your predictable ideas into office at the right time.

Is it realistic?

thank you for this excelent article

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