Thursday, April 1, 2010

Sorry, Ben, You Did It Again

In this blog post, Paul Krugman quotes a Ben Bernanke speech of 2002 and then comes up with, frankly, a bizarre conclusion.

Here is a quote from Bernanke's speech (and the quote, historically speaking, is wrong):
It was in large part to improve the management of banking panics that the Federal Reserve was created in 1913. However, as Friedman and Schwartz discuss in some detail, in the early 1930s the Federal Reserve did not serve that function. The problem within the Fed was largely doctrinal: Fed officials appeared to subscribe to Treasury Secretary Andrew Mellon’s infamous ‘liquidationist’ thesis, that weeding out “weak” banks was a harsh but necessary prerequisite to the recovery of the banking system. Moreover, most of the failing banks were small banks (as opposed to what we would now call money-center banks) and not members of the Federal Reserve System. Thus the Fed saw no particular need to try to stem the panics.
Krugman then declares:
The point is that breaking up the big players, then saying that it’s OK to let banks fail because no one player is crucial to the system is not a solution.
Uh, this is a non sequitur (a favorite argumentation tool that Krugman uses time and again), and really is head-scratching. One of the arguments for breaking up large banks has been that if they are "too big to fail," then they need bailing out, which causes lots of problems.

However, Krugman goes on, even if we break up the banks and then make them "not to big to fail," nonetheless, we should bail out those banks, too. This does not compute, people. If we are supposed to bail out banks no matter how big they are, then the original doctrine of breaking up banks is unnecessary. (Actually, I don't subscribe to the "too big to fail" doctrine, but since Krugman does, I figured I would challenge him on his own ground.)

Throughout the speech, Bernanke acts as though the only player in this whole affair was the Federal Reserve System, as though President Herbert Hoover's massive interventions did not happen. (My guess is that Bernanke, like Krugman, believes that Krugman actually followed Andrew Mellon's "liquidation" advice and did nothing. That is not true, no matter how many times these guys claim it is.)

However, Bernanke saves the best for last. In his speech, he closes with this:
For practical central bankers, among which I now count myself, Friedman and Schwartz's analysis leaves many lessons. What I take from their work is the idea that monetary forces, particularly if unleashed in a destabilizing direction, can be extremely powerful. The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman's words, a "stable monetary background"--for example as reflected in low and stable inflation.

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.
Bernanke is right, and even more right than he realizes. Indeed, the Fed's actions of holding down interest rates and fueling not only the stock market bubble of a decade ago, but also the disastrous housing bubble truly does demonstrate that "destabilizing" actions by central banks can bring financial calamity, and we are living that right now.

However, this is not what Bernanke means. No, he means that the Fed did not "inflate" enough from 1929 to 1933, and he would not make that "mistake" again. And he has not, and the calamity grows worse.

Unfortunately, the Austrian paradigm, while explaining this downturn perfectly, is not popular among the "elite" economists, who really want to believe that if they crank up the printing presses and borrow money until the cows come home, they can beat this downturn via government spending. That "solution" never has worked, and it never will work. Bernanke has done it again, just as his predecessors 80 years ago had done. And, just like his Fed forebears, he never will understand the damage he has done and will continue to do.

1 comment:

R.P. said...

It looks like a major typo here:

"My guess is that Bernanke, like Krugman, believes that Krugman actually followed Andrew Mellon's 'liquidation' advice and did nothing."

I think that was supposed to read:

"My guess is that Bernanke, like Krugman, believes that Hoover actually followed Andrew Mellon's 'liquidation' advice and did nothing."