Is Bernanke In Trouble?

Two Democratic US Senators, Barbara Boxer of California and Russell Feingold of Wisconsin, signaled last week that they would not support the reappointment of Ben Bernanke as chairman of the Federal Reserve System. While most people regard Boxer and Feingold as belonging to the left wing of the Democratic Party, Bernanke has been unpopular with the right wing of the Republican Party as well for his inflationary policies. (Apparently Boxer and Feingold want MORE inflation, if you can believe that.) With critics on both right and left then, Bernanke might well be in trouble so far as his reappointment goes. If he didn't get reappointed he apparently would be the first presidential nominee for Fed chairman whom Congress did not appoint.

With Bernanke's position as Fed chairman (but not as a Fed board member, for which his separate 14-year term doesn't expire until 2020) in at least some doubt, it's worthwhile to review how he, his successor Alan Greenspan, presidents Bush and Obama, and Congress got the economy into the worst recession since 1946 and possibly since the Great Depression itself. Rather than reinventing the wheel, I'll quote from messages I sent previously.

Tuesday, August 25, 2009
"Greenspan actually started the mess by creating too much money which helped by Fannie Mae and Freddie Mac ended up going mostly into real estate, where it gave people the erroneous impression that it represented more wealth. If the new money had pushed up consumer prices instead of real estate prices, everyone would have recognized it for the inflation that it was. Bernanke tried to stop the inevitable bust that came from Greenspan's inflationary bubble--by creating another inflationary bubble. So instead of just suffering a recession we suffered recession AND inflation, with food and especially gasoline prices spiking sharply in 2008. The spike in fuel prices savaged both the auto makers and the airlines, ensuring an even deeper recession."

Saturday, January 9, 2010
"I've been saying for maybe a year now that the economy likely would get worse before it got better. The trouble started back in the middle of the decade when the Federal Reserve System, under Alan Greenspan, caused the money supply to grow substantially faster than the real economy was growing. Much of the excess money, driven by Fannie Mae and Freddie Mac housing subsidies, wound up in real estate, artificially inflating real estate prices, creating a bubble that eventually had to burst. It did burst, as you probably know, starting in 2006 with the weakest borrowers in the so-called sub-prime mortgage market. The collapse of the sub-prime market led the bubble to burst in the rest of the housing market, dragging down the economy.

"Starting in late 2007 the Federal Reserve System, then (and now) under Ben Bernanke, tried to stop what seemed like a likely recession caused by the first monetary bubble by--yes, that's right, by creating a second monetary bubble. It's a bit like trying to stop a cocaine addict from going through withdrawal by giving him more cocaine. I thought back in 2007 that we might have avoided a recession, but once Bernanke started inflating the money supply drastically faster than the real economy was growing, I predicted that we would have the very recession that he was trying to prevent.

"Bernanke (and surprisingly, Greenspan) are Keynesian economists. Keynesian theory teaches that government can wave a magic wand and create new "aggregate demand" out of thin air. (We'll have more on Keynesian economics for those of you in my macroeconomics class.) By inflating the money supply, the government can create the short-term appearance that aggregate demand has risen, but when people figure out that it's just more money chasing the same level of goods and services, the monetary bubble bursts and rather than having more aggregate demand we actually end up with less of it. So by pursuing the fatally-flawed Keynesian polices to try to prevent the recession, Bernanke actually caused (or helped cause) the very recession he wanted to prevent.

"Fiscal policy has the same effect as monetary policy: all the trillions of dollars of "TARP" and "stimulus" spending passed by the Democrats in Congress and supported by Republican President Bush and Democratic President Obama simply helps circulate all the new money that the Fed creates, making the bubble--and the bust--even bigger. You might recall those skyrocketing oil and gas (and food) prices in 2007, which hurt the auto and airline industries. The skyrocketing prices came directly from the Bernanke-Bush polices of inflate and spend. The stock market bubble of 2007, which alas for John McCain burst right after the Republican convention, also came directly as a result of the Bernanke monetary inflation. Obama and Bernanke have followed the same policies of inflation and government spending that led to the real estate and stock market bubbles, so it's not surprising that more than two years after Bernanke started them to try to stop the downward spiral caused by Greenspan's earlier inflation, we remained mired in recession.

"Bernanke has testified before Congress because he's up for re-appointment and apparently he wants the job again very much. And has he learned his lesson, the lesson for which we paid so dearly in the 1970s and early 1980s, that government can't spend and inflate the economy into real growth? No. He sees his fatally-flawed policies, on the contrary, as having saved the economy from even worse. So more than two years after he started the current mess to try to clean up the mess caused by his predecessor, I'm still saying that I wouldn't be surprised if things get even worse before they get better."

So it sounds like reappointing Ben Bernanke would be a very bad idea indeed, and that if President Obama does reappoint him we could expect a continuation of the current ruinous Keynesian inflationary policy. The catch, however, is that if President Obama doesn't reappoint Bernanke, Barbara Boxer and Russell Feingold want the president to appoint someone even WORSE.

I suspect, when push comes to shove, that Boxer and Feingold, and perhaps a couple of conservative Senate Republicans, will ask Bernanke some embarrassing questions, and he’ll pat himself on the back and claim again he saved us from another Great Depression, and that a majority in the Senate will end up approving his reappointment. Did I mention that I expect the economy to get worse before it gets better?

You can read the full story in The New York Times at http://www.nytimes.com/2010/01/23/business/economy/23fed.html?th&emc=th.