Monday, April 9, 2012

Parsing Bernanke

. Monday, April 9, 2012

I've just now been able to read Roger Lowenstein's profile of Ben Bernanke in The Atlantic. There's a lot of good stuff in it, but I want to highlight a few parts:

Rising to his own defense, he told me, “I would argue that everything we have done has been in the interest of the American public and, broadly, of the global economy. A lot of people get that.” (Privately, Bernanke and Timothy Geithner, the treasury secretary, have shared mutual wonder that the financial rescue, which they consider a success, has been so widely panned. Geithner told me that recently, when he informed Bernanke that yet another officeholder had asked for each of their resignations, Bernanke wryly quipped, “Well, that’s a step up from being accused of treason.”) 

A bit later Bernanke references Bagehot and Lowenstein observes that “Bernanke has a sense of history uncommon among public officials”. I should hope so, since in his academic life Bernanke was a scholar of the Great Depression. But this confirms two things that I've long suspected but that have no been confirmed in print until this point: that Bernanke seems himself as the world's central banker, not just the U.S.'s central banker, and that he feels constrained by American politics.

The first is important for a host of reasons, and helps explain many of the less-discussed Fed actions. It's important because Bernanke seems to understand that because the U.S. banking system is central to the global banking system, a disruption here leads to disruptions elsewhere. Financial disruptions everywhere leads to political instability, and political instability can lead to conflict. Bernanke thus took all the actions that the Fed either could not or would not take in the 1930s to make damn well sure that whatever happened this go 'round we wouldn't get that again. Bernanke, i.e., was willing to go to whatever lengths he had to make sure this time was different, at least politically. This means removing the objects of political contention, and that in turn means opening up swap lines with every major central bank in the world. That means direct lending to important foreign firms.* To stabilize a global banking system you have to act like a global central banker. Bernanke did that.

The article actually questions Bernanke's international role:
Nor has he exploited the natural leadership role of the Fed chairman on the world stage, for instance during the crisis in Europe. When Alan Greenspan showed up at international meetings, he got star treatment. Bernanke, says one former White House official, is just “another guy at the table.” 
Greenspan's previous cult of personality notwithstanding, there are very good reasons for Bernanke not to showboat, particularly when he's involved in extending billions – perhaps trillions – in loans to foreign firms. The chairman of the House committee that oversees the Fed famously wants to abolish the institution; Bernanke's re-confirmation vote was the closest in the history of the Fed; the Fed's regulatory authority has come under attack; a former GOP presidential front-runner threatened to lynch him if he showed up in Texas; the Occupy movement seems to believe that Bernanke exists only to serve the banking sector. Etc. Bernanke is very politically constrained right now. To advertise that he is running the global economy – and not entirely for the benefit of the U.S. – would exacerbate those who oppose him. He is also constrained by his own committee. As the article notes, Bernanke has had more votes against his proposals than any Fed chief in 20 years.

Lowenstein claims that the Fed has a “dual mandate” – to promote full employment and low inflation – but in actuality the Fed has a triple mandate: the first two plus regulation of the banking sector. These goals are sometimes in tension, and when they are the Fed must choose which to privilege. This is a highly political decision, and one can certainly understand why Bernanke would feel a need to be protective of himself and his office. Particularly when it's pretty clear that he broke the law or came close to it:
Under the Federal Reserve Act, the Fed is authorized to make loans under “unusual and exigent circumstances” as long as the loans are “secured to the satisfaction of the Federal Reserve banks,” meaning, as long as the Fed does not expect to suffer any losses. A fair argument can be made that in the depths of the crisis, some of the Fed’s emergency loans violated this dictum. 
The political pressures Bernanke is facing comes up again when Lowenstein discusses the debate over whether the Fed should increase it's targeted inflation rate and quotes Mankiw as saying that no central banker would do it because "the political reaction would be too severe".

It's a good article in general, and there's a lot of detail both about the Fed's policies since the crisis and the fallout from them.

*Someone on Twitter snarkily remarked that it was disingenuous of Bernanke to invoke Bagehot because he didn't follow Bagehot's advice to lend freely, but only to solvent firms and only at penalty rates. I obviously can't speak for Bernanke here, but there's no reason to be doctrinaire on this point; the goal is to stabilize the banking sector at any and all costs. If that means relaxing some rules that a journalist made up nearly 150 years ago, well then do it. Now I think this can have some pernicious effects, as some of my research is pretty skeptical of the priorities of central banks with mandates that extend beyond stabilizing the macroeconomy, but crises are crises. Every other concern goes out the window until later.

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Parsing Bernanke
 

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