Bernanke

0:00It's a pleasure to be here today and I want to thank all the members of the Mises Institute for supporting great events like this. You are ultimately the people who make it happen. And when I was first asked to speak at this particular conference, I thought for about one second, I said, Bernanke. I want to speak about Bernanke. He's the only one who's been in this mess from the very beginning. He's one of the persons that helped create the housing bubble. He's the one that helped lure investors into investing in toxic assets. He's the one that denied there was a housing bubble. He's the one that tried to cover up the economic crisis. And now he's helping the government paper over its massive deficits and helping to wreck the rest of what's left of the U.S. economy.

0:51A few years ago I wrote an article for lewrockwell.com dot com entitled Green Spam. In that article I described the testimony of Alan Greenspan, the chairman of the Federal Reserve, as dangerous to listen to. I urged readers to delete his words from their minds just like they delete spam email messages. Things have become much and much worse under Ben Bernanke as chairman. Ben Bernanke's testimony is of course misleading, convoluted and inconsistent, and he's also made statements and predictions that are blatantly untrue, incorrect, not to mention very dangerous.

1:38First, a few words about this guy, Bernanke. Bernanke went to Harvard University and got an undergraduate degree in economics at Harvard University. He then went to graduate school at the Massachusetts Institute of Technology, or MIT, where he received his Ph.D. in economics. His thesis advisor was Stanley Fisher, and his committee consisted of Fisher, Dornbusch, and Robert Solow, a Nobel Prize winner. So it's safe to say that he had an elite education in mainstream economics. Bernanke went on to teach at Stanford University, New York University and Princeton University where he served as chairman of the economics department from 1996 to 2002.

2:25And the economics department at Princeton during this time was the equivalent of the New York Yankees in baseball, a lot of big hitters. Bernanke has authored several key major textbooks. He was the National Bureau of Economic Research's director of monetary economics and he was was an editor of the American Economic Review. He is currently ranked 23rd in terms of being an academic economics publisher, despite being out of academia for almost a decade. Bernanke was appointed as a member of the Federal Reserve Board of Governors in 2002. He was then appointed by President Bush to be chairman of the President's Council of Economic Advisors. Then Bush appointed him to be chairman of the Fed in 2005.

3:15Of course, he was re-nominated by President Obama in 2009. And in 2009, Time Magazine named Bernanke its Person of the Year. Not a bad run-up in fame and influence for a little boy from rural South Carolina. Just to be clear, Bernanke received a top-notch education in mainstream economics at Harvard and MIT under the direction of the leading economist in academia. He has taught at premier institutions and held key leadership roles within the profession. He is considered one of the most important researchers and publishers of his generation and is best known for his research on the Great Depression, where he added an important distinction to the contributions of Milton Friedman and Anna Schwartz.

4:07For Bernanke, the Great Depression was less about the Federal Reserve reducing the money supply, which is the Friedman and Schwartz hypothesis, and more about bank failures that increase the cost of credit and decreases its availability. For Bernanke, a downturn can lead to bank failures which curtail the availability of and this reduces economic activity further so that the economy spirals into a vicious cycle ending in economic depression. I want to come back to that, his hypothesis, a little later because it's critical in getting an overall understanding of Bernanke and what's going on and why he does what he does.

4:53So now on to his record over the last 10 years or so. As I mentioned, Bernanke served as a member of the Board of Governors of the Federal Reserve from 2002 to 2005. In one of his very first speeches as a governor, it was entitled, Deflation, Making Sure It Doesn't Happen Here. This is where he outlined what he is now referred to as the Bernanke Doctrine. This doctrine holds that deflation or a general decline in prices is a highly destructive phenomenon. even if it's one that is unlikely to occur in the United States. However, if deflation were to occur, the Federal Reserve, according to the Bernanke Doctrine, must resort to the printing press and several unconventional policy procedures if reducing interest rates alone fails to reverse the deflation. This would involve the following, increasing the money supply at a rapid rate, Ensuring liquidity to all financial markets, lowering the interest rate to zero, controlling rates on private bonds and securities, devaluing the dollar, lowering the exchange rate of the dollar, assisting the Treasury to buy equity stakes in private companies,

6:15and in his theory, it actually says, buy every share of every company in the country. Of course he says, but it's probably unnecessary to go that far. Amazing. He would do basically anything that's necessary to prevent the failure of major financial firms. At the time, in 2002, it all seemed too far-fetched, but not anymore. According to Bernanke in 2002, quote, The sources of deflation are not a mystery. Deflation is almost all cases a side effect of a collapse in aggregate demand, a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.

7:04Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending, namely recession, rising unemployment and financial stress. Now, the blunders in this one paragraph almost make me want to pull the hair out of my head. For example, if all we know is that a collapse in aggregate demand is a source of deflation, then its cause is a mystery, not a lack of mystery, because aggregate demand does not illuminate the sectors in the economy that are causing the problem. And only in a footnote does Bernanke suggest that an increase in aggregate supply, which of course is generally a good thing, so only in a footnote does he suggest that is a possibility that would lead to deflation.

8:04For the most part, Bernanke thinks that deflation is the cause of all of our economic troubles. The problem with Bernanke is that he's working with mainstream economic theory and ignoring history. He thinks deflation is bad, it's unlikely to happen, but if it does happen, he will use weapons of mass economic destruction to prevent it from happening further. Now in reality, deflation of prices is a normal aspect of the market economy. It's simply the production of goods is outstripping the production of money resulting in Lower Prices and Higher Real Wages. Historically then, deflation has been a common feature of the American economy, particularly before the Federal Reserve.

8:54And the one time there was a significant deflation of prices and an economic decline was the Great Depression. And that's basically the only time that happened. So apparently Bernanke's study of economic history was restricted to that one period. Because two economists have published a study in the American Economic Review in 2004 that examined the association of deflation and depression. They looked at 17 major countries, well over a hundred years of data, and concluded that quote, beyond the Great Depression, the notion of deflation and depression are linked, virtually disappears. Michael Bordeaux's work, which he writes for the National Bureau of Economic Research, also suggests that there is no clear linkage between, or necessary linkage between, deflation and depression.

9:50Okay, then we go down to 2004 and the Great Moderation Debate. In 2004, during the housing bubble, Bernanke addressed the phenomenon referred to as the Great Moderation. This is refers to the decrease in volatility in inflation and the decreased volatility in economic growth, and that basically had occurred over the previous two decades. Bernanke found that it was improvements in monetary policy that had not been given their full credit in terms of creating this great moderation. Quote Bernanke, the great moderation, a substantial decline in macroeconomic volatility over the past 20 years is a striking economic development, whether the dominant cause of the great moderation is structural change, improved monetary policy or simply good luck is an important question about which no consensus has yet emerged.

10:51I have argued here today that improved monetary policy was likely made an important contribution not only to the reduction of the volatility of inflation, but also to the reduction of the volatility of output as well. This conclusion on my part makes me optimistic for the future because I am confident that monetary policy makers will not forget the lessons of the 1970s. You want to bet? I have put my case, this is Bernanke, I have put my case for better monetary policy rather forcefully today because I think it is likely that the policy explanation for the Great Moderation deserves more credit than it has received in literature. So he's basically saying, you know, the economy's, the inflation's come down, it's less volatile, the economy has smoothed out over the last two decades, and I'm here today to claim credit for Monetary Policy Reducing All That Thing, All Those Issues.

11:50So obviously, changes in monetary policy can bring about reductions in volatility in the economy. There's no doubt about that. However, if the changes brought about this less volatility from 1984 to 2004, then what about the increased volatility since 2006, Mr. Bernanke? That's when you took over as chairman of the Federal Reserve until today. Was it the previous policy still in place when you came into office that caused the increased volatility? Or was it changes in monetary policy that you helped bring about that has caused the increased volatility since 2006? Which one is it? It's got to be one or the other.

12:36Probably the worst of Bernanke's statement occurred in 2006, and this is near the zenith of the housing bubble, remember, and it's a time when all the exotic mortgage products and manipulations were in their so-called prime. This was an era of the subprime mortgage, the interest-only mortgage, the no documentation loans and the heyday of mortgage-backed securities. So this is the pinnacle of all these garbage paper toxic assets. At the time, the new Fed Chairman admitted the possibility of slower growth in housing prices, but confidently declared that if this did happen, he'd just lower interest rates.

13:23Bernanke stated in 2006 that he believed that the mortgage market was now more stable than in the past. He noted in particular that quote, our examiners tell us that lending standards are generally sound and are not comparable to the standards that contributed to the broad problems in the banking industry two decades ago. In particular, real estate appraisals practices have improved. I mean that's just literally unbelievable. It's as if he's hiding in a closet and closing his eyes and covering up his ears so he Bernanke, the former economics professor from Princeton, gave an address to the American Economic Association in January of 2007.

14:16He's the first chairman of the Fed from academia since Arthur Burns in the 1970s. It was Burns who helped take us off the gold standard, and God only knows what Bernanke is going to take us. In addressing his fellow academic economist, Bernanke was unusually bold in describing the Fed's access and ability to use information and data concerning financial markets. This knowledge and expertise includes the market for derivatives and securitized assets. He described the Fed as a type of superhero for financial markets. In discussing the Fed's role as chief regulator of financial markets, he made very powerful Claims Concerning the Fed's Ability to Identify Risks to Anticipate Financial Crisis and Effectively Respond to Any Financial Challenge.

15:10Quoting Bernanke, many large banking organizations are sophisticated participants in financial markets, including the markets for derivatives and securitized assets. In monitoring and analyzing the activities of these banks, the Fed obtains valuable information about Trends in Current Developments in the Markets. Together with the knowledge obtained through its monetary policy and payment activities, information gained through its supervisory activities gives the Fed an exceptionally broad and deep understanding of developments in financial markets and financial institutions. This is just months before everything unwinds in the economy. In its capacity as a bank supervisor, the Fed can obtain detailed information from these institutions about their operations and risk management practices, and can take action as needed to address risks and deficiencies.

16:03The Fed is also either a direct or umbrella supervisor of several large commercial banks that are critical to the payment system through their clearing and settlement activities. In other words, the Fed knows everything there is to know about financial markets. It gets worse. Hard to imagine, yes. In my view, Bernanke, in my view, however, the greatest external benefit of the Fed's supervisory activities are those related to the institution's role in preventing and managing Financial Crisis. In other words, the Fed can prevent most crisis and manage the ones that do occur.

16:56Again, quoting Bernanke, finally, the wide scope of the Fed's activities in financial markets, including not only bank supervision and its roles in the payment system, but also the interaction with primary dealers and the monitoring of capital markets associated with the Making of Monetary Policy has given the Fed a uniquely broad experience in evaluating and responding to emerging financial strains. In other words, the Fed is an experienced forward-looking preventer of financial crisis. This is an incredible claim given Bernanke's the way things have obviously turned out and his own abysmal record of forecasting any Now, in addition to this, of course, Chairman Bernanke is famous on the Internet because of a YouTube video that chronicles his rosy views of the economy from, say, 2005 to 2007.

17:54He denied there was a housing bubble in 2005. He denied that housing prices could decrease substantially in 2005. 2005, and he said that housing bubble would not affect the real economy and employment in 2006, and he tried to calm fears about the subprime mortgage market. He stated that he expected reasonable growth and strength in the economy in 2007, and that the problem in the subprime market, which had then started to become apparent, would would not impact the overall mortgage market or the economy in general. In mid-2007, he declared the global economy strong and predicted a quick return to normal growth in the United States.

18:42And how many times exactly have we heard about those green shoots coming up over the last two years? at a time when as many as 40% of all American families have experienced unemployment, bankruptcy, foreclosure or are currently in jeopardy of losing their homes. Now remember that the Austrians were writing about this housing bubble, its cause and some of the probable outcomes as early as 2003. Bernanke and others have denied that you can predict bubbles and when prodded about the and Predictions of the Austrians and the Austrian Economist, the familiar retort is the broken clock effect.

19:30That is, even a broken clock will get it right twice a day. But not so fast. I collected a list of over 40 people who made reasonably correct predictions about the housing bubble. And about almost 3 quarters of them were followers of the Austrian School, and given that the Austrian School of economists makes up a very teeny percentage of all economists in the world, it would seem that there's much more here than a broken clock. So Bernanke has the credentials of an elite mainstream economist of the highest rank, as well as the highest titles for economists working in government.

20:19Bernanke's defining contribution in economics is this distinction he drew with regard to the Friedman and Schwartz analysis of the Great Depression. Where Friedman and Schwartz found that the economy went into a great depression because of a reduction in the money supply, Bernanke finds that a collapse in the banking industry resulted in restricted credit that came at a higher price and that caused the depression to be great. Both of them agree there was a decline in aggregate demand that could have been averted by prompt action by the Federal Reserve and the government. However, the type of action required is different and this is important.

21:06Friedman and Schwartz argued that the Federal Reserve should have acted to increase the money supply or at least to prevent it from falling. In contrast, Bernanke believed that the Federal Reserve should have prevented the collapse of banks. The Friedman and Schwartz solution would have allowed banks to fail, although presumably fewer than did fail due to the increases in the money supply and liquidity. Bernanke, in contrast, would have acted to bail out most banks from failing in order to maintain the availability of credit in the economy. and he would have been less concerned with the overall money supply. Whether either of these policies would have worked is dubious because as Murray Rothbard wrote, other interventionist policies by the Hoover administration were preventing the economy from correcting itself, a view that is gaining some adherence today within mainstream economics. The relevant issue for today is that Bernanke essentially believes that it is the Federal Reserve's job to bailout financial institutions in order to maintain the channels of credit and prevent other non-monetary factors from negatively impacting aggregate demand.

22:24This explains Bernanke's bold support and swift action to bailout financial firms like Bear Stearns and AIG, the nationalization of Fannie Mae and Freddie Mac, backstopping and home markets such as the money market, mutual funds, and absorbing vast quantities of toxic assets onto the Federal Reserve's balance sheet. In preparing for this lecture, I began to realize just how an obvious choice Ben Bernanke was for chairman of the Fed. From the point of view of banks, corporations, Wall Street, which is also known as the corporatocracy or government run for the point of view and interest of large corporations.

23:14Who would be a better choice than somebody who literally wrote the book on bailing out banks and Wall Street during a financial crisis? You couldn't really find anybody better suited to defend your interest than Mr. Ben Bernanke. Another example of all this is driving down the value of the dollar. This means higher prices for you and me, but hey, it's great for exports, is what they'll tell you on CNBC, you know, well, you know, it's going to lead to maybe some higher prices for the vast majority of people, but it's great for exports, which again is largely the corporatocracy, the large corporations. When you realize that the Fed is the major engine which enriches the corporatocracy at Another example is interest rates. Banks benefit, corporations benefit, but how about Main Street, small business and savers? Lowering the interest rate from here especially only hurts savers, retirees and even small town banks who cannot access all this cheap money from the Fed.

24:18Lowering the interest rate from here, especially, only hurts savers, retirees, and even small-town banks who cannot access all this cheap money from the Fed. Of course, this is a constant theme on CNBC and Bloomberg, is where do retirees and institutions and pensions go to get yield? Well, there's no yield out there because Bernanke has suppressed the interest rate as far as it can possibly go. So this exploitation effect that Bernanke is helping to bring about, where the corporatocracy benefits a great deal, is protected from many of their own failures and mistakes, while everybody else in the country suffers, Even the president of the Federal Reserve Bank of Dallas noted this week that it would seem that the Fed is only helping the corporatocracy move overseas before the whole U.S. economy crashes and burns.

25:20Quoting Richard Fisher, the president of the Dallas Fed, In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. Far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks beyond buying stock and expanding dividends is to invest it abroad where taxes are lower and governments are more eager to please.

26:06So we're entering the fourth year of this economic crisis. We should not be surprised to see additional moves on the part of Ben Bernanke. After all, he admired FDR, Franklin Delano Roosevelt, for his bold and innovative policy-making and he has replicated FDR's approach at the Fed, even down to the use of those acronyms, TARP and TELF and all that stuff. So don't be surprised if we see a lot more quantitative easing with each successful downturn in the economy. I'd like to end today with a quote from Murray Rothbard from many years ago. Quote, as we face the future, the prognosis for the dollar and for the international monetary system is grim indeed.

26:59Until and unless we can return to the classical gold standard at a realistic gold price, The international monetary system is fated to shift back and forth between fixed and fluctuating exchange rates with each system posing unsolved problems, working badly and finally disintegrating. And fueling this disintegration will be the continued inflation of the supply of dollars and hence of American prices, which show no sign of abating. The prospect for the future is accelerating and eventually runaway inflation at home accompanied by monetary breakdown and economic warfare abroad. This prognosis can only be changed by a drastic alteration of the American and world monetary system by the return to a free market commodity money such as gold and by removing government totally from the monetary scene.

27:55Thank you very much.