Bernanke's Arrogance Problem
When Ben Bernanke and the Federal Reserve announced last month that it was initiating another round of $600 billion in “quantitative easing,” the reaction was swift and negative. The supposed profligacy of the Fed was yet another arrow in the Tea Party quiver and was used to support the contention that government spending is out of control. The international community was equally vociferous, with voices around the world slamming the Fed and Bernanke for devaluing the dollar while hypocritically claiming that the actions were simply meant to stabilize a fragile U.S. recovery.
Watch Fed Chairman Ben Bernanke on 60 Minutes.
Now Bernanke is attempting damage control. He wrote an op-ed in the Washington Post and last night appeared on 60 Minutes to explain and defend his policies. In a world where Fed policy is now the subject of Twitter feeds, a stately, removed central banker is a soon-to-be unemployed central banker. In the 1970s, no one paid much attention to when the Fed met and what it decided, but with Paul Volcker in the 1980s and then Alan Greenspan in the 1990s and 2000s, the chairman of the Federal Reserve became the prima inter pares of the American economy and its governance. If Bernanke is to achieve his goals of stabilizing the system and nurturing a recovery, he has to play the media game.
It would help if he were more dynamic. Greenspan cultivated an oracular air, his utterances vague and technocratic yet hinting at shamanistic powers. Bernanke has none of his predecessor’s aura, though he is also not saddled by the backlash that Greenspan suffered in the wake of the financial collapse. He is an economics professor deeply steeped in the history of central banking who has led the Fed into uncharted territory of massive balance sheet expansion—documents released as part of the financial reform package care of a clause inserted by Senator Bernie Sanders (our Vermont Socialist) show that the Fed extended $3 trillion in liquidity and loans in the wake of the failure of Lehman Brothers in September 2008. And he has remained steadfast in his conviction that the Great Depression was caused by inaction by the Fed.
Determined to avoid the perils of sagging demand, surging unemployment, and resulting deflation—all of which characterized the Great Depression of the 1930s—Bernanke has led the Fed into its current round of lowering real interest rates. With short-term rates as low as they can go, the Fed has taken to more atypical tools, such as buying Treasury securities at lower rates. Or at least that is what Bernanke intends.
He’s certainly right about the problem: continued high unemployment combined with relatively tepid economic activity. In his 60 Minutes interview, he said flatly that unemployment is likely to stay high for four or five years and that it would have been considerably higher than its current 9.8 percent without Fed action over the past two years. He also argued that the current recovery is not self-sustaining without continued government action, and hence this next level of intervention. He sharply rebuked critics who describe what the Fed has done as “printing money.” It has not added any dollars, he claimed. That is too clever by half. The Fed doesn’t ever “print” money; the Treasury does. But his policies put more money in motion, presumably for productive use. In that sense, his defense may be correct but only as semantics.
If Bernanke is to achieve his goals of stabilizing the system and nurturing a recovery, he has to play the media game.
Bernanke at least has a clear vision for what ails the American economy: unemployment and sluggish activity. He also has an unequivocal belief that inflation is not a proximate threat. Finally, he has a cure: more liquidity, more monetary stimulus and continued low rates until activity picks up and employment begins to rebound. In all respects, he has greater clarity than most of his domestic opponents and even many of his allies.
Yet that is also cause for concern, or should be. In his interview last night, Bernanke was asked how confident he was that his policies would yield results and how sure he is in his ability to control the situation. “100 percent,” he answered. 100 percent.
Really? Wasn’t it the over-weaning confidence—arrogance some would say—of economists, bankers and their models that helped create our current travails? Wasn’t it that sense that outcomes could be calculated, predicted, and gamed that led to much of the risk-taking in housing and derivatives that has proved so misguided? And yet here is Bernanke asserting with nary a blink or a hesitation that he is sure beyond doubt, beyond question, beyond margin of error that the current course of action will either work or can be controlled.
Even allowing for the political need to mollify and assuage, that level of certainty should raise alarms. Bernanke may be right, and his willingness to say what no elected politician will about our intractable unemployment problem is refreshingly candid. But that level of certainty is disturbing and suggests that gentle Ben has blinders not much different from those of so many of his predecessors.
Bernanke shares a rock-solid conviction that cycles can be controlled, genies bottled, and that right policies will tame the anarchy of human economies. At times, that may be an antidote, but just as often it is the seed of the next great fallacy. It would be more assuring if Ben acknowledged that indeed, we don’t know what we don’t know, that the future may present challenges unforeseen and difficult to predict, and that creativity and a nimble pragmatism are the most important qualities to guide policy. That would not be an admission of weakness, but a sign of wisdom and maturity.
But no. As Ben says, unemployment and deflation may be greater risks than inflation, but he and therefore we seem to have learned not a whit from the overwhelming arrogance and illusions of control that helped generate the most recent dancing on the abyss. And that is troubling indeed.
Zachary Karabell is president of River Twice Research and River Twice Capital. A regular commentator on CNBC and a columnist for Time magazine, he is the co-author of Sustainable Excellence: The Future of Business in a Fast-Changing World and Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends On It.