Ben Bernanke Is Worried, Which Is Why Readers Shouldn't Be
As the headline accompanying this piece makes plain, Ben Bernanke is worried. That the former Fed Chairman is worried explains why readers shouldn’t be.
Up front, dismissal of what’s keeping Bernanke up at night isn’t an effect of his now-famous assertion in June of 2007 that “The troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.” In Bernanke’s defense, if he had possessed a clue about where the economy and markets were headed he wouldn’t have been Fed Chairman in the first place. Those with a truly credible sense of both are earning extraordinary sums as investors.
The above explains why Bernanke similarly shouldn’t be judged for not forcing banks heavily exposed to subprime to divest of same before 2008. How could he have known to tell the banks his Fed was regulating to clean up their balance sheets? Figure that the few investors who saw into the future of subprime, and better yet, who timed their bearishness well, in some instances earned billions in return for their prescience. Importantly, few of those investors, if any, have come close to subsequently duplicating their rather timely bets. In expecting Fed officials to regulate the banks effectively we’re expecting them to spot future trouble spots in ways that the world’s best investors most often cannot. When we ask the Fed to be banking watchdog, we're asking the impossible.
Furthermore, the correction in the subprime space did not cause the “financial crisis” in the first place. Implicit in what is ridiculous is that markets convulse in response to what’s healthy. The latter is an absurd presumption. Markets discount the future. A correction in subprime mortgages that would shrink the migration of precious capital into housing consumption could never have a caused a crisis any more than the failure of a carmaker, retailer or a bank could cause markets to go berserk. Failure is the driver of future success simply because the former frees precious assets and people from ongoing mis-allocation by poor managers. The bigger the collapse of what's poorly run, the better. For obvious reasons. In short, it was the federal government’s interventions in always healthy failure back in 2008 that caused the eventual “crisis,” not the failures and corrections themselves.
Importantly, what has Bernanke worried is that when the next recession hits, the Fed will lack the tools the tools to contain it. Ok, true, but so what?
What readers need to realize is that Bernanke is merely stating the obvious. Of course the Fed lacks the tools to fight a downturn. What’s important is that it never had them to begin with.
If readers doubt this, they need only consider what would happen if the Fed tried to fix the perpetual slow-growth that bedevils impoverished East Palo Alto, neighbor of booming Palo Alto. Imagine if the Fed started buying up bonds from the Wells Fargo and First Republic branches in East Palo Alto with an eye on increasing lending in the troubled city. Such a scenario would fail rather quickly. It would simply because there are few commercial and individual lending options in the immediate area that would rate a loan from either bank. Banks don’t lend with an eye on not being paid back. Because they don’t, most of any Fed-authored increase of dollars in East Palo Alto would quickly migrate away from the city, including to neighboring Palo Alto.
In Palo Alto’s case, it doesn’t need so-called Fed stimulus. Savers around the world are lined up trying to achieve exposure to all the dynamic economic activity taking place there. Whether it’s credit in return for equity, or just lending to Palo Alto’s numerous well-to-do residents, there’s rarely a problem of “money supply” there. Where there’s production, money is always abundant. Where’s there’s little production money is always scarce. The Fed can’t change the previous truth in any U.S. city, state, and its machinations certainly can’t influence the whole U.S. economy despite its past protests to the contrary. Indeed, the alleged injections of loanable dollars that the Fed referred to as “quantitative easing” left the U.S. by the tens of billions each month during this failed experiment. With economic activity stateside not rating the inflow, dollars that also liquefy global economic activity flowed all over the world.
Can the Fed increase credit through its fiddling with the rate target? Let’s be serious. To understand why the mere presumption is a silly one, readers need only contemplate what it is they’re borrowing when they borrow dollars. They don’t borrow greenbacks to stare at them; rather their pursuit of “money” is their pursuit of real economic resources: economic goods like computers, desks, chairs, office space, and most crucial of all, labor. Readers need only ask themselves what is a rhetorical question to see just how obnoxious the Fed’s conceit is: can it increase or shrink access to the economic goods previously mentioned? To believe it can is to believe that the Fed has private warehouses of computers, desks, chairs, office space, and humans. Back to the land of the sentient, only private producers can increase or shrink the economic goods we seek when we borrow “dollars.”
Ok, but Bernanke et al think the Fed can ease access to economic goods through lower interest rates on dollars. That’s fine, as it’s the privilege of economists to reside in the unreal world. But readers in the real world cannot escape reality. Applied to the Fed “lowering” the cost of access to real economic goods, the assumption that it can do the latter is as silly as the long discredited assertion that rent controls on apartments would lead to abundance of same. That’s not a serious view. Neither is the Fed’s. Neither is Bernanke’s. Forget dollars. Credit ease or tightness is always and everywhere an effect of private sector production. The Fed is a sideshow.
The reality is that the cost of accessing resources varies, and floats up and down without regard to the Fed. In Silicon Valley, credit is abundant, but it’s also very expensive for start-ups. For a start-up entrepreneur to attain “money” exchangeable for goods and labor, he’ll have to give up a sizeable portion of the business to the investor willing to risk a lot on what will most likely fail. In Hollywood, even the best of the best are regularly turned down. Despite the cult success of Dazed and Confused, it took Richard Linklater over a decade to secure funding for its sequel, Everybody Wants Some!
President Donald Trump had a notoriously bad reputation with U.S. banks such that many wouldn’t touch him back in the days when he was seeking finance for his property ventures. At the same time, it’s easy for Apple to borrow at rates comparable to what the U.S. Treasury (the best credit risk since it’s backed by you, the U.S. taxpayer) can, as would it be easy for Bill Gates to borrow. Borrowing costs are set in the marketplace, not by the Fed.
Falling prices scare Bernanke, but then they’re the norm in a growing economy. A thoroughgoing Keynesian, Bernanke believes that falling prices scare away consumers. On its own his theorizing is embarrassing. Entrepreneurs can’t innovate without savings, which means an individual decision to not consume is merely a shift of consumptive power to someone else, or better yet, a shift of dollars to an entrepreneur or business in search of them to exchange for capital goods. How this is harmful to the economy is something Bernanke has never explained. Also unexplained by the former Fed chair is the historical reality that prices in a booming economy are always falling. Always. Economic growth is an effect of investment, and investors are relentlessly helping producers enhance the efficiency of their production. That’s how Apple can sell for $1,000 a smartphone that – if the technology had existed – would have cost millions not too many years ago. It’s how $25,000 UHDTVs in 2014 cost a few hundred dollars today. Yet Americans continue to voraciously purchase all manner of goods and services despite very real knowledge that today’s expensive luxury item is tomorrow’s prosaic commodity.
To all this, Bernanke’s alleged “solution” is, per fellow Keynesian Robert Samuelson, “throwing more money at a faltering economy in the hope that it would recover and be stabilized.” Oh dear. Bernanke is a reminder of why the Founders were ardent federalists. They wanted the inevitable hopelessness of policymakers to be contained to cities and states. Don’t nationalize the fallible ways of those who aspire to policymaking. In Bernanke’s case, let’s imagine if his theorizing were limited just to Baltimore. Imagine if the Fed dropped billions into its inner city. Would this stimulate? No. Whether saved or spent the “money” would ultimately migrate well away from where there’s very little economic activity, much as it would quickly depart East Palo Alto if dropped there. What’s true for Baltimore and East Palo Alto is what’s true for countries. Money drops can’t fix them. Thank goodness they can’t. They reveal why recessions are so healthy.
What Bernanke wants the Fed to fight is what the individuals and businesses which comprise what we call an “economy” need. During recessions, the scarcity of investment and loanable dollars is what forces them to correct bad habits developed, release underutilized workers back into the marketplace, mothball bad investments, and shut down lousy companies of the WebVan variety. In short, recessions are necessary, and they’re economy-enhancing. Without them, Silicon Valley would be poor, weighed down by its many failures from the past; still alive and wasting precious capital. In a college football sense, fighting recessions is the equivalent of Alabama giving former coach Mike Shula a new contract even though Nick Saban is ready and willing to replace him. Getting right to the point, to fight recessions is to fight recovery. Indeed, the recession IS the recovery because it signals a cleansing of all that’s not working.
So Ben Bernanke is once again worried. His fear is that the Fed lacks the tools to fight the recession of tomorrow. Ok, the Fed once again never had those tools. But for those who think it did, how wonderful if Bernanke’s worst fears are true. If so, a Fed that can no longer fight recessions can, by extension, no longer get in the way of recovery. Hallelujah! What has Bernanke worried is what should have readers exceedingly optimistic.
