Ben Bernanke: The Best Man for the Job
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.'
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