Ben Bernanke Still Misses the Point
Writing about former Fed Chairman Arthur Burns in his 1998 book, Nixon’s Economy, economic historian Allen Matusow noted that Burns “had no fixed monetary principle of his own, except a determined eclecticism that translated into unsteadiness of purpose.” Though he fought against the suspension of the Bretton Wood’s world-dollar standard, in the end Burns was “too ready to sacrifice clarity for surface harmony in the policy directives of the Federal Open Market Committee.”
Fast forward to today and we have another Fed Chairman lacking any clarity of purpose; Ben Bernanke’s lack of policy principle arguably at the heart of our present financial problems. In a Wall Street Journal op-ed last week, Bernanke seemed to channel the Burns approach with his proclamation that “Our strategy will continue to evolve and be refined, and we will adapt to new developments and the inevitable setbacks.” And while it should be said that dollar policy is traditionally the preserve of Treasury, it’s also remarkable that in a piece titled, “We’re Laying the Groundwork for Recovery”, Bernanke didn’t once mention the dollar.
To omit any mention of the dollar at this stage of the game is for Bernanke to miss the point. At the heart of the present financial crisis lies investment mismatches, or what Von Mises referred to as mal-investment. With the dollar weak this decade, all manner of investments priced in dollars, or priced in currencies with either explicit or vague dollar definitions were distorted. Absent a weak dollar that created the illusion of a property boom, it’s safe to say that investment in same would have been more rational, and as such, any mistakes made in this area more easily contained.
Instead, Bernanke as mentioned talked up a strategy that “will continue to evolve” just a few paragraphs before his essential acknowledgment that “government engagement in times of severe financial crisis often arrives very late, usually at a point at which most financial institutions are insolvent or nearly so.” Exactly. If the Fed or any government agency had the kind of hotline to the future that even the best investors would admit they don’t possess, maybe the markets might feel more comfortable with present governmental efforts to fix what has gone awry.
The problem with governmental fixes is that Bernanke was perhaps unwittingly all too correct. There’s no way government bureaucrats with no money on the line and with very little market knowledge can know what the most seasoned of investors don’t. Regulators will always be late, which makes Bernanke’s promise of a “comprehensive review of our regulatory structures” so much wasted energy.
Bernanke writes that, “Over the past year, the Federal Reserve has actively used all its powers and authority to try to help our economy through this difficult time.” What seemingly hasn’t occurred to Bernanke is that with markets most useful for discounting the future, the Fed’s efforts have been resoundingly booed by investors; the Dow Jones Industrial Average down 40 percent over the period in which the Fed and federal agencies have sought to be relevant.
The above shouldn’t surprise us because in the end the Fed cannot create wealth or economic growth. Put simply, the Fed only distorts economic activity unless its efforts further the process whereby the dollar is made stable in value. Nothing of the sort has happened under Bernanke. Instead, the dollar in gold terms has bounced around on Bernanke’s watch; from $480 when he was nominated to $1,000 over the summer, to $800 today. Is it any wonder that banks are reluctant to lend dollars with the concept’s value a moving target, not to mention securities priced in dollars?
Bernanke suggests that “prompt passage of the financial rescue legislation” will allow financial firms to fulfill “their critical function of providing new credit”, but even there he misreads the problem. Banks don’t so much lack money to lend as they don’t trust the balance sheets of other banks. The latter in mind, the alleged financial rescue plan will only serve to make the health of banks and the securities on their balance sheets even more opaque due to the insertion of money not from market-disciplined investors, but from the federal government itself.
Bernanke argues that today’s problems, like those in the past, result from “a loss of confidence by investors and the public in the strength of key financial institutions and markets.” More realistically, investors regularly penalize the institutions they’ve lost confidence in, all the while rewarding those who’ve earned it. That is why capitalism works so well for capital always reaching those who will deploy it best.
What’s wrong right now is that investors don’t trust the federal policies that got us here, and they’re correctly horrified that the architects of today’s crisis will now be given seemingly unlimited money to fix that which they broke. In short, investors have lost confidence in Bernanke, Paulson and a Washington political class whose very confusion has made the formerly venerated U.S. economy a laughingstock.
For all his faults, John Connally, Nixon’s Treasury Secretary, made the essential point that money itself “cannot produce, increase efficiency, or open markets abroad.” Connally’s words were very true, and in light of today, simple “money” injections into banks, rate-target machinations, economy-harming "stimulus" packages (Bernanke's latest suggestion), and other eclectic solutions will not lay the groundwork for recovery as Bernanke assumes.
The answer in the end is far simpler in that while money itself is insignificant except as a measuring rod enabling wealth-enhancing investment and trade, it becomes very significant when its value is uncertain. So rather than spew worthless platitudes about evolving solutions, Bernanke would do well to keep it simple himself.
A stable dollar is what the economy lacks. That in mind, to fix the economy Bernanke should huddle with Paulson and craft a plan to stabilize the dollar in terms of something real. Once he and Paulson do that, their work will be done. Markets and economies don’t need government help, they simply need their governments to make stable the currencies they issue.