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Ben Bernanke: The Best Man for the Job

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November 10, 2010 – Comments (12)

Bashing Ben Bernanke is the new sport.  HIs Q rating is probably hovering somewhere between Lebron James and Christine O'Donnell.  Even Sarah Palin, always the front runner in the intellectual arena (sarcasm, of course) has jumped on board.  "Cease and desist," she declared, referring to the Fed's decision to buy $600 whatevers in government bonds. 

But bashing Bernanke without a solid understanding of the role of the Federal Reserve chairman doesn't do the American citizen any good.  In fact, Ben Bernanke is the best man for the job.  If Ben can't do it, no one can. 

This Is The Best We Can Do

Bernanke's credentials are impeccable.  In any room he walks into, there's a 99.9% chance that he is the most prolific academic economist there.  He earned his undergraduate degree in economics at Harvard University.  He earned his PhD in economics at MIT.  His studies brought him into direct contact with Robert Solow (Nobel Prize) and Peter Diamond (Nobel laureate 2010).  He learned from Stanley Fischer and Dale Jorgensen. (See: http://mises.org/daily/4798)

The bottom line is that there may be no one on the planet more qualified to be the Chairman of the Federal Reserve than Ben Bernanke. If you can find someone who is, the difference  is probably negligible. There is simply no point in calling for Bernanke's head.

Despite his remarkable career, Bernanke will go down in history perhaps as the worst Federal Reserve chairman.  He has been wrong on significant economic forecasts more often than the public is willing to tolerate. It's definitely the case that his predecessor, formerly revered by mainstream media as the Maestro of the Recovery, caused many of the economic imbalances that Bernanke inherited.  What is also true, however, is that Bernanke neither saw the trouble coming nor opposed the policies that led to the disaster.

"Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong." - Ben Bernanke, July 2005

"The motor vehicles sector may already be showing signs of strengthening." - Ben Bernanke, November 2006

"Our assessment is that there's not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy. And the lending side of that still seems to be healthy." - Ben Bernanke, February 2007

"Overall, the U.S. economy seems likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend." - Ben Bernanke, July 2007

I could go on, but you get the point. Despite Chariman Bernanke's truly formidable scholarship, he has been wrong repeatedly on the most important economic trends of his brief tenure at the helm.  If you go back to his writings on the economy before he replaced Greenspan, the record does not improve. 

Let's review where we are at, because there is a point to all of this:

1. Ben Bernanke is perhaps the finest, most intelligent economist in America.
2. Ben Bernanke has a record of being on the wrong side of every important economic trend for as long as he has been a professional economist.

This of course begs the question, can anyone perform the task of Chairman of the Federal Reserve?  Like I said, if Ben can't do it, no one can.

America's Next Top Model

The problem arises from Ben Bernanke's economic model, the same model taught to him by Nobel Prize winners as was taught to them by Nobel winners.  The model is a failure.  It has two major flaws. The first flaw is that economic models cannot replicate human action.  Unlike the hard sciences, economists are working with sometimes mature animals that have a near infinite array of choices before them and whose actions cannot be predicted in advance.  Bernanke's economic model cannot account for this. 

Here's a simple example: Groupon. You may have heard of Groupon, a very successful "group coupon" (get it?) business. Groupon partners with businesses to offer large discounts to customers, but the group coupon only applies if a target number of sign ups has been reached.  If the target is not met, the coupon is not valid.  (My fiancee introduced me to Groupon. She is a huge fan.)

There is no Groupon in mainstream economic models.  Restaurants, furniture stores, tourist destinations, etc., face a market inefficiency that prevents them from reaching Pareto optimum. No human action. No solution. Here, Bernanke was taught that it was the role of a central planner to step in and solve these thorny problems of marginal cost curves that cannot rise and other perceived market inefficiencies. Groupon, resourceful people engaging in voluntary exchange, is simply not part of the equation.

Bernanke's Solutions Are The Problem

This leads right into the second and perhaps most important flaw in Bernanke's economic model: the reliance on involuntary exchange.  Since there is no human action in his problem analysis, the solution is always force, i.e. forcing at least one party to the transaction into an exchange that they would not agree to under the circumstances (e.g. funding government debt.)  Every action the Federal Reserve takes is an involuntary exchange for at least one party.  I have hammered this point home in recent posts, but it's worth it to continue down this path as often as we can.

The market ecnonomy is built by voluntary exchanges between one (autistic exchange) or more people (direct or indirect exchange) for a percieved benefit (for monetary or other reasons). 

There simply is no market economy that is built on involuntary exchange. A lot of work has been done over the years building up an economic model that calls for a certain level of "intervention" in the market, even though no one can actually explain how an economy built on voluntary exchange and human action will be improved with some level of involutary exchange based on models that treat humans like particles in a physics experiment.

So Bernanke, perceiving "market failure", is proceeding exactly as any other highly qualified, even brilliant mainstream academic economist would in his attempt to analyze and solve market problems. Second guessing him, intervening in his attempts to conduct monetary policy, even replacing him as Federal Reserve Chairman is totally pointless.  The next person in charge will do the exact same thing, working from the same crude economic models and offering the same 'solutions.'

Economic Revolution

But the cause isn't totally lost. While the Dinosaurs of Economics continue to fumble predicitons and policy, a meteor is headed their way.  There is an economic revolution occurring outside the mainstream. It wasn't planned that way, of couse, as the best things happen by accident. Ironically, the Dinosaurs of Economics sped up their date with extinction. By rejecting discussion economic theories based on voluntary exchange and human action, they sealed their own fate.

Meanwhile, outside of Ivy League classrooms and Federal Reserve conference rooms, everyone else is learning a new approach - an approach that actually takes humans into account when studying economics. 

When enough people understand that mainstream economic theory is only slightly more effective than black magic, Americans won't be calling for Bernanke to "cease and desist." They'll be demanding Congress take the one step that can save this great country from mainstream economic 'solutions.' They will tell Congress to End the Fed.

David in Qatar

12 Comments – Post Your Own

#1) On November 10, 2010 at 1:58 AM, guiron (20.24) wrote:

They will tell Congress to End the Fed.

Sorry, but that's simply not going to happen under any scenario outside of the feverish dreams of Randian acolytes. Anyone who is thinking this is likely to happen is far more deluded than anyone at the Fed. You think you have more power than those who actually hold those Treasuries? Fat chance. Anyway, for what it's worth, very few people think Bernanke should go, not enough to make a difference politically, certainly not enough to end the Fed. Nobody I know is even talking about that. Fractional reserve banking is an esoteric subject to the vast majority of people. They are mostly talking about jobs. That may mean other politicians get elected instead of the incumbents, but it has nothing to do with abstract economics. Regardless, that doesn't mean we toss our economic system out on the faith that the chaos of crowds will produce a perfect market, because that idealizes some sort of unattainable purity that has nothing to do with economics and everything to do with ideology, not to mention faith in charismatic populist politicians.

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#2) On November 10, 2010 at 2:37 AM, whereaminow (20.57) wrote:

Well, you've always been a hit-and-run commentor, so I'll just have some fun here:

1. I think you have set the record for the most consecutive comments in  which you have used the terms "faith" and "ideology" to characterize people with whom you disagree. I think that's a qualification to write at HuffPo. Might be something to keep in mind in case you are ever out of work.

2. Thanks for pointing out that the Federal Reserve won't be dismantled tomorrow. I really thought if I clicked my heels three times, crossed my fingers on both hands, and prayed really hard to the right diety, I could make that happen. 

3. I forgot to take a survey of the people you talk to before I wrote this blog. That was a tremendous oversight that I will correct before I ever write anything here again.  Please leave their contact information in a follow-up comment.

David in Qatar

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#3) On November 10, 2010 at 8:17 AM, Jbay76 (< 20) wrote:

David, thanks for the post.  I do enjoy reading your comments

+1 

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#4) On November 10, 2010 at 9:30 AM, FreeMarkets (93.26) wrote:

#1 guiron wrote: " that doesn't mean we toss our economic system out on the faith that the chaos of crowds will produce a perfect market, because that idealizes some sort of unattainable purity that has nothing to do with economics and everything to do with ideology, not to mention faith in charismatic populist politicians."

This is what I don't understand by people supporting the Federal Reserve system.  This country became the #1 economic system in the world specifically by NOT having a Federal Reserve.

Average people could dig up gold and silver and bring it to a mint and have them made into U.S. coins.  They would spend or save the money.  They could trust or NOT trust a bank note for exchange.  They could literally CHOOSE what they wanted for exchange - as long as they always accepted the gold / silver U.S. mint coins.

Then, in 1907, too many people that trusted bank notes created a banking panic.  Progressive Theodore Roosevelt was led by the nose by JP Morgan and they started work on the Federal Reserve Act, which was passed by the Wilson administration in 1913.

But what happened to the 1907 panic?  It's not the panic of 1907-1910, or even 1907-1908.  It ended with the banks without enough reserves failing and the people learning a valuable lesson.

Then in 1913, that lesson became unimportant, as the FED was there to back up the banks.  In less than one generation, we were sitting on an 15 year depression.  In fact, since the creation of the FED, we've lived 1/3 of the time in recessions. 
Under the gold standard of 1870-1913 Americans lived 1/10 of the time in recessions.

Based on the facts, I'll happily put my faith in what you call "the chaos of crowds".

PS: David, another great post.  +1

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#5) On November 10, 2010 at 10:03 AM, miteycasey (30.86) wrote:

The bottom line is that there may be no one on the planet more qualified to be the Chairman of the Federal Reserve than Ben Bernanke.

There is a huge difference between being qualified to do a job and doing the job well.

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#6) On November 10, 2010 at 11:13 AM, dbjella (< 20) wrote:

 miteycasey 

What does it mean to do the job well?

What do you think he should do? 

 

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#7) On November 10, 2010 at 11:30 AM, BurntTiger (< 20) wrote:

you remind me of prof de la paz from Robert Heinliens "the moon is a harsh mistress"

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#8) On November 10, 2010 at 1:09 PM, whereaminow (20.57) wrote:

You guys all kick a**!  Thanks for the many many rec's for another boring old econ blog. You guys (and gals, if there are any) make my day!

All the best,

David in Qatar 

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#9) On November 10, 2010 at 1:44 PM, miteycasey (30.86) wrote:

I believe Ben is driven by his expertise in the Depression. He's hell bent on not allowing another depression to occure no matter what happens to the general economy. He'll go to his grave saying "A second depression didn't happen on my watch".  Nevermind the carnage left behind to the average person living on Main Street.

Ben has a myopic view of the economy, not only that he's often wrong. He's made several morket calls which have been proven repeatedly to be wrong(read the OP). Personally I wonder if he does this for PR reasons or if he actually belives what he says, meaning he says auto sales are growing in 2006 hoping that people will believe him and start buying autos. Nevermind auto sales were falling off a cliff.

I feel todays politician underestimate the intellegence of average people. They are able to see through lies today better because they don't trust. 

 As for what he should do? Nothing. Let the econonmy play out. Instead of trying to manuver like your driving a sports car think of the economy more as an 18-wheeler.  Instead of trying to force a market recover over the next year allow 3-4 years for the housing market to correct. The forclosures are goign to take time to get through the system, like a snake eatting a pig. It takes a few minutes to get it intirely into it's mouth, but takes a week to get it through its entire digestive system.

 

 

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#10) On November 10, 2010 at 3:55 PM, QualityPicks (63.80) wrote:

The Fed cannot be eliminated. It cannot. They have instituted a ponzi scheme that now the world economy depends on and counts on. If you end the Fed, the game stops, and the world economy collapses.

There is simply no way countries can pay their massive debts. It is not their intention either. Sovereign debt is meant to grow forever.

Ponzi schemes can collapse, and believe me, it seems the US Government and the Fed are doing their best to test how far the scheme will go. This collapse was/would be my only hope for the Fed to get out of the way. But, to my incredulous surprise, the collapse that was supposed to kill corrupt institutions, including the Fed, did the opposite. The Fed stepped up the ponzi scheme to a much greater depth. So I have lost all hope. 

I am sure I will die, and will never see the Fed eliminated, no matter how much I wish the ponzi scheme to end. When I die, the US debt will be way higher (probably 5x-10x as much) than it is right now, along with the rest of the world.

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#11) On November 11, 2010 at 11:53 PM, brokhernowhysher (67.22) wrote:

Great post David.  Sorry to say I agree with QualityPicks

 

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#12) On March 05, 2011 at 3:14 AM, JoannReamer (< 20) wrote:

The case for Ben Bernanke starts with his keen intellect. But perhaps more important in these trying times, he has demonstrated great creativity. He has also displayed the courage to put his head on the chopping block for policies he thinks right. And he is now battle-tested. (Disclosure: I am a long-time friend and former academic colleague of Mr. Bernanke.) 

BR, Joann Reamer, Expert Clinical Manager Jobs from clinical research jobs 

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