Ben Bernanke: 'The Greatest Central Banker In U.S. History'?

During my vacation travels, I spotted Mortimer Zuckerman’s enthusiastic paean to Federal Reserve Chairman Ben Bernanke in the July 26 Wall Street Journal. In his article, Zuckerman lamented President Obama’s “shabby treatment” and “mean-spirited” dismissal of “the greatest central banker in American history,” “the man who saved the economy” through his “heroic effort” and “imaginative...procedures” in the aftermath of the 2008 financial crisis.

Whoa, Mort, slow down! I’ll grant you that the way Obama let it be known that he has no use for Bernanke was tawdry, but what do you expect from this most ungracious of presidents? As a central banker, though, Bernanke’s performance deserves little praise. Let’s review a few of the ways that Zuckerman is mistaken about Bernanke.

First, did Bernanke pull “the country—and ultimately the world economy—back from the abyss”? I assume Zuckerman means that without a massive expansion of the Fed’s balance sheet, there would have been a catastrophic deflation triggering a second Great Depression. Perhaps, but there are two flaws with this widely held belief: 1) Deflation need not be catastrophic. The Friedmanite/Keynesian dogma that the Great Depression was caused primarily by a sharp contraction of the money supply ignores what happened during the sharp-but-brief depression of 1920-21.The money supply contracted just as severely then as it did in the early ‘30s, but the economy quickly rebounded—not because of Fed intervention, but because government got out of the way (lower taxes and spending) and let markets work as flexible prices and wages adjusted to new equilibriums. 2) By preventing the liquidation of debt and malinvestments, the Fed has contributed to the sluggishness of the Obama era economy and has merely postponed those inevitable corrections, i.e., (as has been said ad nauseam) “kicked the can down the road.”

Second, through its unwise interventions, Bernanke’s Fed has painted itself into a corner. What Zuckerman praised as Bernanke’s “untested [and perhaps extralegal] emergency funding procedures” has turned the central bank into the world’s largest repository of financial detritus. The Fed has become a “bad bank”—a garbage dump, by virtue of lending “more than a trillion [newly created] dollars [to] troubled [i.e., over-leveraged, reckless, and often unidentified] financial firms” and buying distressed [i.e., nearly worthless] mortgage assets” and no-bid “debt from industrial corporations such as General Electric .” The Fed will never be able to find buyers for much of the garbage paper it has bought, and what it is able to unload will surely be sold at a significant discount to opportunistic and well-connected financial giants.

Third, Bernanke’s series of QE policies are predicated on a fallacy. The notion of continuing to purchase federal debt until unemployment falls to a certain level is little more than the discredited “Phillips curve”—the theory that monetary inflation leads to lower unemployment, which the stagflation of the 1970s blew to smithereens. The simple economic truth that Bernanke and the public policy establishment willfully ignore is that unemployment is a cost phenomenon. (If it were a monetary phenomenon, then there wouldn’t be an unemployment problem in any country with a central bank, because the bank would merrily create money and credit until everyone who wanted to work had one.) Our unemployment has remained stubbornly high not because of monetary policy, but because of a widespread mispricing of labor due to various combinations of the wages, benefits, inflexible contracts, tax and regulatory costs of labor.

Fourth, Bernanke’s policies have been both unfair and economically harmful to the American people. In the private sector, by selectively assisting certain corporate entities, particularly on Wall Street, Bernanke has exercised the kind of power that Obama likes—i.e., picking economic winners. (Indeed, Zuckerman enthusiastically approves of Bernanke having “transformed the Fed” into “an active market participant” that has abandoned any pretense of impartiality, but millions of Americans regard this as blatantly unfair.) Bernanke’s bailouts have increased moral hazard by rescuing and propping up zombie firms guilty of misfeasance and malfeasance.

In the public sector, Bernanke has been the essential enabler of the unconscionable deficit spending of recent years. If it were not for his creation of fiat credit via QE interventions, the federal spending surge of recent years would have pushed the market price of interest to balloon rather than collapse. That would have caused the annual carrying costs of the federal debt to soar, which, in turn, would have made it much harder for Congress and the president to spend so much. Bernanke’s massive purchases of federal debt have hurt the American people by adding to Washington’s power to transferring additional control of real wealth

Fifth, where Zuckerman applauds Bernanke for “manipulating prices and forcing interest rates down to virtually zero,” this policy deserves our strongest condemnation. Interest rates perform the vital functions of rationally pricing capital and helping to coordinate production between the present and the future. By sabotaging this market, Bernanke has been wreaking havoc with entrepreneurial and business decisions, penalizing savers, and sowing the seeds of future economic problems resulting from the as-yet unseen malinvestments produced by his artificially low interest rates.

Far from being “the greatest central banker in American history,” Ben Bernanke has misdiagnosed our economic problems, undermined the soundness and respectability of the Fed, trampled on the principles of justice, and undermined the naturally self-correcting functions of free markets. In some ways, he is a tragic figure, at once both immensely powerful and totally powerless. On the one hand, his words move financial markets. Earlier this year, a statistician reported an astounding .85 correlation between the QE programs and stock market performance showing that the bull market has been the product of Bernanke’s interventions. On the other hand, Bernanke seems to sense that QE can’t continue forever, but he is reluctant to stop QE, because once he does, the economy is likely to head south in a hurry.

If there is one thing for which we can thank Ben Bernanke, it is that his policies should prove once and for all that central banks can't produce economic growth. They can, however, undermine prosperity.