Bernanke Reappointed

I was about to "go to press" with the title and article that follows when I heard of the reappointment. Topics are too precious to waste; so I'm going with it anyway. Congratulations to President Obama for his good judgment. Congratulations to Ben, who must be thinking that no good deed goes unpunished.

Should Bernanke be Reappointed?

I'm asked that a lot these days. My answer is "Yes, of course, and he should be given a medal for saving our financial system." Then comes, "But he, or the Fed, didn't see the crisis coming," or, "The Fed caused the crisis by creating the real estate bubble." There are more "ors," but let's start with these two.

The Fed didn't see the crisis coming.

Nobody with the authority to do something about it saw it coming. Not the Fed; not the SEC; not the banking regulators (OCC, FDIC or OTS); not Congress. In fact, Congress kept giving Fannie and Freddie quotas to meet to expand home ownership among low income people.

The Fed created the real estate bubble with easy money.

If we're talking about 2002 and 2003 here, the Fed was leaning against a weakening economy experiencing disinflation and threatening outright deflation. This was true to a lesser extent after the Fed began a gradual tightening in June 2004. Few bother to explain how a monetary policy leaning against economic weakness and promoting disinflation in the broad economy is creating rapid inflation in only one sector.

The real estate bubble didn't cause the crisis anyway.

Have we already forgotten the moral hazard created by the making and securitization of subprime loans? The financial crisis was caused, not by too many loans, but by too many bad loans and the sprinkling of those bad loans into mortgage backed securities all over the globe. Many things made the contagion worse, but they weren't the cause of the crisis.

(I first learned that people take the wrong lessons from crises during the S&L crisis in Maryland in 1985. Ohio had a major problem with privately insured S&Ls. Maryland had a similar system; so a silent run on Maryland's state chartered privately insured S&Ls began immediately, eventually prompting the closing of 102 of them. A few problems, including fraud, were uncovered during the examinations to reopen them. Those few problems were taken to be the cause of the crisis even though the crisis and the closings had occurred months earlier.)

Notice how the same type thing is happening now. We rarely hear about subprime loans any more. Instead, the problem is attributed to greed, Wall Street, the banks, executive compensation, corporate meetings in Vegas, company planes, the Bush Administration, and so forth.

Comments (1)

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  1. I agree with you, but for pragmatic reasons. I still basically follow Milton Friedman’s essay:

    “Should There Be an Independent Monetary Authority?”

    I gather that, nowadays at least, this is not a popular position.