On Sunday, I wrote a column that sought to answer a narrow question: Would the economy have been better off had the Federal Reserve kept rates above near zero and helped savers, thus giving this cohort more money in their fixed-income investments and, presumably, consumer power?
The answer, based on history and numerous studies, is a commanding “no.” The central bank was facing a crisis unlike any seen since the Great Depression. One huge danger was deflation. Driving down interest rates and keeping them there was necessary.
Otherwise, in the brief space allowed, I gave the Fed a B-plus, “with lost points for failing to see the magnitude of the disaster earlier and for leaving questions as to how much it will really regulate the Too Big To Fail Banks in the future.”
This brought out many name-calling emails that received my standard Krackpot response*, but also this intelligent riposte from a person with deep experience in banking:
Bernanke certainly was complicit in the denuding of the middle class of wealth, if nothing else as an accessory after the fact. More directly all of the off-book lending that had to be discovered by the NY Times in Freedom of Information act requests showing trillions lent to the banksters, which enabled the farce further realized by Obama to perpetuate and lock in the theft by (Goldman Sachs) and (JP)Morgan.
He has a point. History is an argument without end, and the Fed will never be off the hook. What didn’t happen was a repeat of the central-banking mistakes of the 1930s, policies that many conservatives claimed to support despite their disastrous results then (studied by Milton Friedman — as serious economist rather than right-wing polemicist — and Anna Schwartz). It is no small matter that the world avoided a second Great Depression, and most of the credit must go to the aggressive measures of the Federal Reserve.
That said, the Fed was complicit in blowing up the housing bubble and, yes, it used its powers to prop up the existing financial system and allowed the Too Big to Fail banks to recover and prosper.
But the bigger culprits are:
- Deregulation of the financial system and the child-like belief — and dogma — that markets would be “self-regulating.”
- The unregulated shadow-banking system and largely unregulated or even understood exotic derivatives market.
- Lapdog regulators and bought-off members of Congress.
- Failure to pass a simple 21st century Glass-Steagall Act and break up the TBTF banks. Much of Dodd-Frank has yet to be implemented as rules and probably never will, so great is the power of the “financial services industry.”
- Failure to change the incentives to high risk and high leverage, including executive compensation.
- Failure to spend more, and act more effectively, to help mortgage holders.
- No major bankster went to prison.
- Failure to pass an adequate and sustained stimulus, especially one that focused on building and operating infrastructure, research and new industries.
We could go deeper into causes of the 30-plus year decline of the middle class. But this will do. And the buck stops at President Obama. But he had plenty of help from Republicans determined to block him, even to the point of national default, corporate Democrats and the misguided religion of austerity. And don’t forget the Supreme Court, whose judicial activism has ensured that American politics are owned by moneyed interests.
So Ben Bernanke is a good target for examination, and rightly so. But don’t stop there.
Today’s Econ Haiku:
A new Cold War, no
Boeing designs in Moscow
Europe needs the gas
* My standard response to a Krackpot name-calling email:
Dear Sir or Madam:
Thank you for the note and for the kind words. Due to the large volume of e-mails I receive I am unable to respond to each one personally. However, I feel that it is important to at least acknowledge those who have taken the time to say something complimentary, if only through this computer generated reply. I appreciate it.