The case against Ben Bernanke

July 30, 2009

Over at ClusterStock, former Merrill Lynch strategist Richard Bernstein tells us why it should be “one and done” for Ben Bernanke. (He compares BB to Burns and Miller from the 1970s. Ouch!)

1) He is a status quo chairman when big change is needed.

His policies both before and after the banking and credit crises have attempted to maintain financial market status quo. … Mr. Bernanke’s comments regarding his inability to proactively control financial bubbles, and the ease with which the Fed could manage a bubble’s deflation, were astonishing for their naïveté. The fact that the credit bubble’s deflation caused the worst recession of the post-war period seems to demonstrate that Mr. Bernanke has failed even according to his previously expressed expectations.
2) He is too close to Wall Street.
Wall Street thrives on financial asset inflation’s cheaper and more abundant credit. Mr. Greenspan and Mr. Bernanke made sure that the Street was not disappointed regardless of the longer-term detrimental effect on the US economy. The next Fed Chairman should be more concerned with the stability of the financial sector, rather than with the growth of the financial sector.
3) He doesn’t understand the dangers of financial asset inflation.

The future of monetary policy, in my opinion, will focus on the delicate balance between real and financial asset inflation. The US economy does not function well when there is excessive real asset inflation. The 1970s have proven that. However, the US economy also does not function well when there is excessive financial asset inflation. … Yet most central bankers, like Mr. Bernanke, do not yet appreciate this delicate balance. They continue to operate under the assumption that real asset inflation is bad and financial asset inflation is good.  In this respect, Mr. Bernanke’s term as Fed Chairman seems to mimic those of Arthur Burns and William Miller during the 1970s.

Bernstein’s bottom line:
The next Fed Chairman should probably come from one of the Federal Reserve’s district banks. The person should not primarily focus on Wall Street, but rather should fully understand how the optimal cost of capital in the financial markets drives efficient real investment and maintains a stable banking system. The next Fed Chairman should have a thorough understanding of small businesses lending (imagine if TARP money had gone to the Small Business Administration instead of to bank trading desks?) and how the future of the US economy depends on efficient real investment and not on financial engineering. That person undoubtedly exists somewhere within the Federal Reserve Board but, unfortunately, it is not Mr. Bernanke.

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For me the case against Bernanke is simply his job should not exist. Congress should be coining(not printing) our money and regulating commerce among foreign nations. Of course that can be just as scary with the weak representation we are plagued with.

Posted by jason | Report as abusive

I was curious to see how Bernstein concluded his opinion on Bernanke. The beginning parts of his case were the general & dated talking points from the Obama campaign.

1) I don’t know how anyone could call Bernanke “status quo” especially in light of the extreme & heroic measures the Fed has undertaken over the last 10 months (which has had the not so small benefit of saving Obama’s bacon these few months later & more importantly the Country & the world economy– but never miss a chance to bite the hand that feeds you). I thought it was universally accepted that the heavy lifting by the Fed was a key component of averting complete disaster(?) and creating current stability. Today the President inexplicably stated it was his Stimulus bill that is goosing the “recovery.” What was in that Bud Lite?

2) Next the nonsense about being “too close to Wall St.” — another deeply held article of faith for Obamacrats. This has proven to be one big obstacle to first class government appointments. Accordingly, it’s best to apponit someone who is removed from the source, academics are best or even someone who has an arcane or tangential connection to the subject at hand(!!!?) They lost out on appointing Rodgin Cohen. This extends to foreign policy where even Sec. of State Clinton has groused about the appointment procedures. Is the Treasury Dept. even close to half staffed yet?

To his 3rd point, who the heck puts any kind of “asset inflation” on the top of the list right now –really -? The bigger risk is hyper-inflation, which would be a result of the Fed not having an exit strategy for quantative easing. It’s going to be tough to turn off the spigot & we’d all prefer someone who won’t be leveraged by the politicos.

Last, Bernstein’s concluding argument was rife with nonsense. TARP, Small Biz, etc. Does he forget how TARP came to be, what it’s purpose was? It was meant to avert collapse.

Is his concluding argument an opening salvo for gov. involvement & investment in small biz? Does he forget that all this commenced with “real investment” – homes? He wants to expand the recklessness further when the first mess isn’t cleaned up?

Kinda dumb.

Posted by Siobhan Sack | Report as abusive