How the Fed Saved the Economy – NOT
Nobody’s education in economics is complete until the subject of Fedspeak is mastered. Unfortunately, this comes under the heading of “advanced topics.” Knowledge of basic economics is not nearly sufficient to the task – the full range of political economy is required. Some abnormal psychology wouldn’t hurt, either.
“Fedspeak” is the idiom unique to occupants of the chairmanship of the Federal Reserve Board of Governors. It implies much while saying little as indefinitely as possible. Fedspeak comes by its economic content honestly, since the Federal Reserve is the “banker’s bank” to the nation’s nationally chartered banks and charts the course for monetary policy. The political content is a different story. Officially, the Federal Reserve is independent from politics. Nonetheless, Fedspeak is permeated with political meaning. Just as the allegedly independent justices of the Supreme Court cannot be prevented from reading the election returns, the Federal Reserve’s conduct of monetary policy cannot be divorced from politics.
The recent Wall Street Journal op-ed, “How the Fed Saved the Economy,” (WSJ, 10/5/15) by Ben Bernanke, is a perfect case in point. Bernanke is no longer Fed Chairman, having served from 2006 – 2014. But once a Fedspeak-er, always a Fedspeak-er; the accent is unshakable.
We begin with the headline. It catches the reader’s eye and sets the tone. What many people may not know is that standard journalistic practice allows the newspaper, not the author, the right to compose the headline. Eminent authors may, or may not, be given the privilege of approving the paper’s choice. The liberties taken by this headline make us wish we knew who composed it.
Presumably, the headline refers to actions taken concurrent with, and immediately subsequent to, the financial crisis of September/October, 2008; namely, the bailout of Bear Stearns, failure to bail out Lehman Brothers, bailout of AIG and massive purchases of securities by the Fed. But Bernanke’s op-ed says nothing about those actions, focusing instead on the “extraordinary monetary policies” (Bernanke’s own term) pursued during Bernanke’s tenure “to help the economy recover from a historic financial crisis.”
The choice of words is contradictory; it puts the headline at odds with the op-ed. Saving the economy is one thing. Helping it recover is another. The latter implies that it would recover on its own, but helping speeds the recovery and/or makes it more robust. Saving the economy implies that otherwise it might never recover, or at the very least that the recovery would be a long time coming.
The headline leads the reader to believe that what follows will explain how the Fed’s policies saved the economy; e.g., rescued the economy from utter destruction or from a truly dire fate. That doesn’t happen. Bernanke refers to the financial crisis as “historic,” but otherwise leaves it to his readers to imagine what fate was in store for us in the absence of the Fed’s (also unnamed) policies.
Thus, it is by no means clear that the economy needed saving or, if it did, that the Fed’s actions saved it. Bernanke doesn’t tell us what we were ostensibly saved from or what the Fed did to save us. Instead, he refers rather sweepingly to “extraordinary measures” taken to “help the economy recover.” What did we recover from? Well, we actually suffered a recession that began nine months before the financial crisis (in December 2007). But the extraordinary measures Bernanke refers to were taken in response to a “financial crisis.”
The best reason for thinking that Bernanke may be responsible for the headline is that it is classic Fedspeak. It implies something grand, glorious and vast – but says nothing definite or comprehensible, since there is no definable economic meaning to “saving the economy.”
There’s no getting around the fact that this headline does not belong on this op-ed. It is only fair to admit that Bernanke himself may not be responsible for the headline. But somebody, whether intentionally or inadvertently, has perpetrated a serious act of journalistic misrepresentation. Either Ben Bernanke wants us to believe that the Fed saved the economy but doesn’t want to go to the trouble of proving it or somebody at the Wall Street Journal does. Or thinks Bernanke does. Or thinks Bernanke has proved it in this op-ed… somehow.
Bernanke on the Fed’s Role
In his second paragraph, Bernanke seizes his chance to perform a classic Fedspeak maneuver. He performs an exercise in definition. An exercise in definition might be defining terms, defining a task or a defining a policy. What makes it classic Fedspeak, though, is that the Fedspeak-er does not perform the exercise in a logically correct way. Instead, he performs it for his own convenience; e.g., to make him and his actions look good even when they are bad. In this case, Bernanke’s exercise in definition concerns the nature of monetary policy.
Bernanke’s implicit distinction between recession and financial crisis would make sense – if he were treating the Fed as purely a financial regulator and monetary steward with power to affect inflation but not the real economy of goods and services. That would probably be the logically correct view, or at least the consensus view among academic economists. Bernanke, employing Fedspeak, imbues the Fed with greater powers.
After Bernanke declares it “essential to be clear on what monetary policy can and cannot achieve,” he states that “the Fed has little or no control over long-term economic fundamentals – the skills of the workforce, the energy and vision of entrepreneurs, and the pace at which new technologies are developed and adapted for commercial use.” The words “little or” have a special significance in Fedspeak. An ordinary economist would simply admit that the Fed has no control whatsoever over these things. But flat categorical limitations on the Fed’s powers are taboo in Fed-Speak. To be sure, a Fed Chairman must avoid claiming absolute control over things, for that would leave him stuck with responsibility for too much of what actually happens. But he must claim some control over practically everything in order to justify the steadily increasing money and power that is given to him and his agency.
Sure enough – in the next paragraph Bernanke has the Feb “mitigating recessions” and forestalling the “tragedy” of “high unemployment,” as well as “keeping inflation low and stable.” In other words, the Fed – which can only control the quantity of money and indirectly affect interest rates – is supposed to bear responsibility for the rate of employment. This gives the Fed power to control the annual rate of economic growth. In turn, this means that the central bank will fight unemployment by printing money. As recently as a decade ago, this statement would have generated a mixture of anger and hilarity among the world’s economists.
Of course, “low” is a relative term. Bernanke identifies 2% as the proper inflation target. Why not, say, “as close to zero as is practicable?” After all, this was the standard chosen by many eminent economists for many years. Bernanke cites “the economic risks posed by deflation” without identifying the risks or their relative magnitude. He says the 2% target is “similar to that of most other central banks around the world.” Bernanke has defined the optimal rate of inflation in order to suit his (or, more precisely, the Fed’s) convenience. Choosing a positive rate of inflation as optimal allows the Fed to err on either side of its target rate, while avoiding inflation is an asymmetric standard that allows only error on the positive side – and not much at that.
Having set his own standards, Bernanke now proceeds to grade himself (and his successor as Fed Chairman, Janet Yellen). The 5.1% unemployment rate “is close to normal,” although there may be “some distance left to go.” “Underlying” inflation is “around 1.5%,” which is “somewhat below the 2% target, a situation the Fed needs to remedy.” Why the uncertainty associated with the unemployment rate is any less troubling than that associated with the inflation rate is a mystery that Bernanke does not unravel for us. But on this one point, Bernanke is categorical; the Fed cannot tolerate an “underlying” inflation rate of “about 1.5%” when its target rate is 2%.
Once again, Bernanke has chosen his definitions – of “normality” in unemployment and “intolerability” in inflation – to suit his (and the current Fed’s) convenience. He wants us to believe that his policies were correct and have led to the return of relative prosperity, so 5.1% unemployment is defined as virtually normal without further discussion. He wants the Fed to continue to hold interest rates low by printing more money, so 1.5% “underlying” inflation is defined as intolerably low.
Bernanke’s Response to His Critics
Before concluding, Bernanke cannot resist a rhetorical chortle at the expense of Fed critics who have predicted for years that the Fed’s policies of “quantitative expansion” would produce “hyperinflation, a collapsing dollar and surging commodity prices.” He replies: “None of that has happened.”
Another unique feature of Fedspeak is that fluent practitioners acquire facility in observing only those facts favorable to their side of an argument. Unfavorable facts are disregarded or simply go unseen. In the current online issue of Forbes Magazine, Brian Domitrovic points out that Bernanke is – at best – one for three. During Bernanke’s tenure, “the dollar depreciated… to a greater degree than at any point in the 43-year history of the statistic” [e.g., than during the era of flexible exchange rates]. Oil and gold, the two commodities most sensitive to monetary policy, both appreciated dramatically during Bernanke’s tenure (Feb., 2006 – Feb., 2014). Oil rose from a then-record $68 per barrel to $96 per barrel. Gold rose from $560 per ounce to $1300 per ounce. As regards inflation, Bernanke says nothing about the trillions of dollars in excess bank reserves created by the QE program or about the Fed’s own balance sheet, which is sagging from the weight of the over-valued securities it has purchased from member banks over the last few years. He omits any mention of the Fed’s payment of interest on excess reserves or hyperactive regulatory program, which have induced banks to hold reserves in preference to making loans. These facts would explain why inflation may merely have been deferred for a time and why the prosperity he touts may be illusory.
Bernanke does not confine his score-settling to domestic economic disputes. He still holds a grudge against German finance minister Wolfgang Schaeuble, who labeled round two of the Fed’s QE program “clueless.” To the sound of axes grinding in the background, Bernanke takes his revenge. “At the time,” Bernanke reminds us, “the unemployment rates in Europe and the U.S. were 10.2% and 9.4%, respectively. Today the U.S. jobless rate is close to 5%, while the European rate has risen to 10.9%.” Bernanke attributes the relative stasis of Europe to “Europe’s failure to employ monetary and fiscal policy aggressively after the financial crisis,” causing “Eurozone output [to be] about 0.8% below its pre-crisis peak” whereas “the U.S. economy is 8.9% above the earlier peak.”
Here, Bernanke employs one of the most effective tools of Fedspeak – the selective comparison. The rules of logic say that meaningful comparison requires that we compare like with like. But Fedspeak allows the speaker to tailor the comparison to his personal needs; he need only pretend to compare like with like. So Bernanke compares U.S. national economic policy with that of “Europe” because the Eurozone is “a major industrialized economy of similar size.”
Bernanke’s comparison satisfies the demands of Fedspeak because the U.S. and the Eurozone are indeed alike in size. But it makes no sense to compare overall U.S.economic policy with Europe’s because the U.S. is one unitary country with a single national economic monetary policy and fiscal policy, while Europe is a confederation of many countries of widely varying sizes and fiscal policies, united only by a common currency and similar monetary policy. Even if we were to aggregate the net effect of (say) all European countries’ fiscal policies, the comparison still wouldn’t make sense because that net effect wouldn’t result from one policy stance.
Bernanke clearly feels the need for more supporting evidence that his QE program really works – that the central bank really can print its way to prosperity. He contends that “the United Kingdom is enjoying a solid recovery, in large part because the Bank of England pursued monetary policies similar to the Fed’s in both timing and relative magnitude.”
At this point, Bernanke is availing himself of another convenient property of Fedspeak; namely, that the speaker can say anything he wishes at any point without worrying about contradicting anything he said in the past or might say in the future. Sure enough, Bernanke closes the op-ed maintaining that “monetary policy can accomplish a lot, but… it is no panacea…Fiscal policymakers in Congress need to step up.” In other words, Keynesian deficit spending is needed to complement money printing. Bernanke doesn’t cite the UK as his exemplar here, because the country of John Maynard Keynes has been virtually the only one on the other side of the Atlantic to exert serious fiscal restraint since the Great Recession. And clearly this is wildly at odds with his previous citation of the UK’s “solid recovery.” If the UK had a solid recovery despite violating his precept about fiscal policy, why should we need to observe it? And how do we know that recovery was, indeed, due to monetary ease rather than fiscal rectitude?
It’s Good to Be the King – or the Fed Chairman
This op-ed illustrates might be called “Brooks’ Theorem”: It’s good to be the king – or the Fed Chairman. Bernanke’s status as Fed Chairman emeritus has given him entrée to the Wall Street Journal’s op-ed pages. It may have given him control over the headline on his op-ed. And it has given him vast rhetorical license in the tone and content of his prose.
We tend to view flat statements with suspicion and assume that people who qualify and hedge their statements are being reasonable and truthful. But would you really admire a scientist who said, “Some people say that if I throw a ball up in the air, it’s bound to come back down. I agree, at least on one level”? Bernanke agrees “on one level” that the Fed can’t print our way to prosperity; disagreeing outright would make him look like a madman. But he qualifies his agreement to gain wiggle room for the greatest episode of money creation in the history of the United States. By the insertion of just those three words “on one level,” he has driven a wedge between his policies and economic logic wide enough to accommodate a super tanker. The thrust of monetary economics since its inception – and particularly over the last five decades or so – has been to refute the inflationist fallacy. That is, there is no long-term gain in productivity of goods and services from increasing the quantity of money – there is only an increase in the general level of prices proportional to the growth in money. Bernanke blandly asks his audience to believe the contrary on his say-so.
Even more dangerous than Bernanke’s policy is the deception in which it is cloaked. He doesn’t explain that his policies are extraordinary not merely for their magnitude, but also for contravention of accepted logic and doctrine. (As you might expect, he is somewhat more straightforward when speaking to his professional peers, where he has been quoted as saying that QE doesn’t work in theory but does work in practice.)When a non-economist reads Bernanke’s op-ed, he sees a headline advertising the Fed as an economic savior and accompanying prose couched in familiar-sounding, reassuring, equivocal, non-categorical terms. This is just the way the general public is used to hearing policymakers talk. Most people lack the training necessary to realize that what seems to be safe, sane, middle-of-the-road dialogue from a high-level public official is really the rationalization of an utterly unsound doctrine devised to further a big-government agenda.
Post hoc, ergo propter hoc (“after this, therefore because of this”) is a venerable logical fallacy. Bernanke calls the Fed’s “extraordinary monetary policies” the remedy for a “historic financial crisis.” He then assumes – and asks us to accept – that everything good that happened since that episode was the result of the Fed’s measures. Yet Bernanke himself insists that monetary policy cannot be “the only game in town” and demands that Congress step up to the plate with fiscal policy. But didn’t Congress do just that in early 2009 with nearly $900 billion worth of stimulus spending? Why did Bernanke overlook this example of fiscal policy, as well as the earlier Bush stimulus? Of course, if he brought up examples of fiscal stimulus that occurred in 2008 and 2009, he might feel compelled to explain why unemployment took years to respond. After all, it has long been a key principle of macroeconomic theory that stimulative government policies are necessary because they restore full employment so much more quickly than do free markets. That transition from over 10% unemployment in 2009-2010 to 5.1% unemployment today didn’t come quickly; it took years of additional money printing and continual purchases of securities by the Fed, which virtually crowded the private sector out of the market for government bonds.
He also assumes that the good things he cites were in fact good and that nothing bad happened. It’s true that we ordinarily view a decline in the unemployment rate as a good thing. But when the decline is due to continual withdrawal from the labor force, producing the smallest ratio of employed in nearly forty years, that decline cannot be viewed in the same favorable light. When an unusually large proportion of the employment gains that do occur consist of part-time jobs, and when much part-time employment is involuntary in nature, that isn’t good either. When business investment languishes far below its pre-recession peaks in 2006 and 2007, we have reason to doubt whether the policy of zero-interest rates (ZIRP) is really living up to its billing a la Bernanke.
When Bernanke implicitly takes credit for everything good that has happened since 2008, we have to wonder if he isn’t trying to personally sop up all the excess liquidity that his policies have caused. Basic economic logic tells us that the tremendous productivity increases caused by the North American shale boom, due to innovative technologies like horizontal drilling and fracking, must account for widespread increases in real income and employment. Sure, Bernanke says that monetary policies can’t affect entrepreneurship, technological innovation and adoption. But that doesn’t stop him from claiming all the credit for the difference between U.S. and European output or chalking up the 5.1% unemployment rate as a victory for monetary policy – in flagrant disregard of fundamental economic principles.
What’s In It for Bernanke?
Readers are entitled to wonder – Why should a former Fed chairman go to the trouble of wangling an op-ed in the world’s leading financial publication for the purpose of deceiving its readers? It’s not as if he had to worry about hanging onto his chairmanship, which is now held by Janet Yellen. Economics says that people act purposefully to achieve their ends. Very well. What are Bernanke’s ends? What’s in it for him?
Ben Bernanke serves his short-term, medium-term and long-term goals with this op-ed. The Wall Street Journal’s readers learned from the tag line of the op-ed that “Mr. Bernanke… is the author of ‘The Courage to Act: A Memoir of a Crisis and its Aftermath,’ out Oct. 5 (W.W. Norton).” In show business, movie stars who write their autobiographies promote them by appearing on talk shows. That would be déclassé for an ex-Federal Reserve chairman, who instead promotes his book with an “advertorial,” a disguised promotional piece masquerading as an editorial. That is the immediate, short-term purpose of his op-ed – to maximize the sales of his book by publicizing it for the audience most likely to purchase it. It is worth noting that Bernanke’s lapses of logic may stimulate some people to buy his book, if only to find out if he is really as crazy as he seems.
Bernanke’s medium-term objective is to solidify his current position as an “advisor” to a Wall Street hedge fund. When Bernanke left his job as Fed Chairman, he had to find some way to make money. A return to academia would have represented a demotion both in terms of salary and status. Wall Street was the logical career path for a high (quasi-) government official because it could offer lifetime financial security in exchange for the use of his name and contacts in government. There was only one catch. Bernanke’s value on Wall Street (his “stock,” as it were) would drop like a stone if he were to suffer the same fate as did Alan Greenspan after Greenspan retired as Fed Chairman. During his tenure, Greenspan was lionized as a maestro who presided over the “Great Moderation,” a long period of prosperity interrupted by only one mild recession. But when the financial crisis of 2008 hit, Greenspan was excoriated as the man whose easy-money policies early in the millennium laid the foundation for the disastrous real-estate bubble and ensuing crisis. He has struggled to rehabilitate his reputation ever since. It is reasonable to suppose that Bernanke, Greenspan’s protégé, is determined not to follow in his mentor’s footsteps. For the remainder of Bernanke’s working life, this is a matter of financial self-preservation; were Bernanke’s reputation to nosedive, he would suddenly be “DK’ed” by his Washington contacts. (That is brokerage-business slang for customers who “don’t know” you when it comes time to pay up). Prospective customers of Bernanke’s firm would no longer be queuing up for the privilege of rubbing elbows with him. His value to his firm would plummet and his income would fall with it. That is another reason for Bernanke to defend his actions as Fed Chairman even after his departure from the post.
The long-term purpose behind Bernanke’s op-ed is that Bernanke wants to make sure his name is venerated by historians rather than hated. And the more insecure Bernanke feels about the correctness of his actions, the more frantic will be his efforts to forestall the unfavorable verdict of history. Bernanke’s professional specialty was the study of the Great Depression. He was constantly exposed to the vitriol heaped upon President Herbert Hoover’s supposed devotion to laissez faire and failure to prevent widespread unemployment. When Bernanke became Fed Chairman, it can hardly be surprising that, when confronted with a financial crisis, he viewed it in the worst possible light. In retrospect, it is clear that Bernanke would never err on the side of inaction, only on the side of overreaction. Financial crises are commonplace in U.S. economic history, not rare. There is no reason to suspect that economic Armageddon awaited the U.S. or the world in 2008. Indeed, there is no such well-defined concept in the vocabulary of economics. The Great Depression of the late 1920s and 1930s is the only historical period that calls to mind such images. For decades, economic textbooks have assured their readers that a recurrence of the Depression was unlikely or impossible. We have only Ben Bernanke’s word for it that bailouts, massive stimulus, price-supports for securities and QE were required to “save the economy.”
The philosophy of science has acquainted us with the Law of the Instrument. Loosely translated by one humorist, it means that when you give a small boy a hammer, he will find that everything he encounters needs pounding. Economics departments in American higher education created an instrument in Ben Bernanke’s mind and he found the temptation to use it irresistible. He will now pay the penalty for his policies. Although he held down the Fed chairmanship for only eight years, he will remain a figurative Fed chairman, condemned to communicate in Fedspeak while spending the rest of his days defending his actions.