Monday, June 29, 2009

A comment on Fed Chairman Ben Bernanke

by Bill McBride on 6/29/2009 01:27:00 PM

Given all the recent attacks, I'd be remiss if I didn't write something about Bernanke, but first ...

I've been a regular critic of Ben Bernanke. I thought he missed the housing and credit bubble when he was a member of the Fed Board of Governors from 2002 to 2005. And I frequently ridiculed his comments when he was Chairman of the President Bush's Council of Economic Advisers from June 2005 to January 2006.

In 2005, I posted these comments from Bernanke and disagreed strongly:

"While speculative behavior appears to be surfacing in some local markets, strong economic fundamentals are contributing importantly to the housing boom," ...

Those fundamentals, Bernanke said, include low mortgage rates, rising employment and incomes, a growing population and a limited supply of homes or land in some areas.

"For example, states exhibiting higher rates of job growth also tend to have experienced greater appreciation in house prices,"
And after Bernanke wrote a commentary in the WSJ: The Goldilocks Economy, I called it "bunkum" and I argued Bernanke was channeling Calvin Coolidge:
The entire commentary is bunkum. But instead of correcting each of Bernanke's false assertions, I've found the template for his talking points:
No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquillity and contentment, harmonious relations between management and wage earner, freedom from industrial strife, and the highest record of years of prosperity.
Calvin Coolidge, State of the Union Address, December 4, 1928
Bernanke is now channeling Coolidge's monument to economic shortsightedness.
And I disagreed again in July 2005 when Bernanke said:
Top White House economic adviser Ben Bernanke said on Friday strong U.S. housing prices reflect a healthy economy and he doubts there will be a national decline in prices.

"House prices have gone up a lot," Bernanke said in an interview on CNBC television. "It seems pretty clear, though, that there are a lot of strong fundamentals underlying that.

"The economy is strong. Jobs have been strong, incomes have been strong, mortgage rates have been very low," the chairman of the White House Council of Economic Advisers said.

The pace of housing prices may slow at some point, Bernanke said, but they are unlikely to drop on a national basis.

"We've never had a decline in housing prices on a nationwide basis," he said, "What I think is more likely is that house prices will slow, maybe stabilize ... I don't think it's going to drive the economy too far from its full-employment path, though."
And we can't forget Bernanke's "contained" to subprime comments in March 2007?
Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
That became a running joke.

With that lengthy prelude, I've felt once Bernanke started to understand the problem, he was very effective at providing liquidity for the markets. The financial system faced both a liquidity and a solvency crisis, and it is the Fed's role to provide appropriate liquidity (we can disagree on what is appropriate). I don't think it is the Fed's role to run an insurance company - but I think that is as much the failure of Paulson's Treasury as overreach by the Fed.

And given all the recent attacks on Bernanke - many of them very personal - I'd like to reprint some of Jim Hamilton's comments: On grilling the Fed Chair
It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.
I agree with Professor Hamilton.