US President Barack Obama's fake red line in Syria dented his credibility and perhaps irretrievably so (see Lousy game theory in Syria, Asia Times Online, September 4, 2013). Not to be outdone, the man he fired as Fed president over the summer, Ben Bernanke, also quietly shot himself in the foot. Okay, not so quietly.
Months after initiating a conversation on the "taper" mechanism (see QE Coyote, Asia Times Online, June 21, 2013) for slowly stopping and then reversing the flow of easy money from the Federal Reserve, good old Ben was apparently let down by two factors: firstly a failure of the economy to actually grow and secondly the widely divergent views on market trends that helped
to spook investors and accrue unwanted attention to the FOMC decision this week.
Having made a promise to initiate a taper - a slow end of the current bond buying program by the Federal Reserve - the question was about "when". In this, just like Obama on the "red line" in Syria, Bernanke laid down the expectation of unemployment declining to 7% or below to initiate the action. In the event, the good old economist forgot the cardinal rule of percentage targets - that BOTH the numerator and denominator can move, which renders some targets pointless. In this case, the numerator is the number of unemployed people while the denominator is the number of people participating in the labor market (NOT all eligible workers in a country).
You could take a massive increase in immigration for example that is driven by mounting optimism on economic growth that would mean overall unemployment increases, but so does inflation and growth. Similarly 7% unemployment could indicate the opposite of economic strength if overall confidence declines to the point where labor force participation declines. Therefore, to tie monetary policy changes to a single number was always going to be a dumb idea.
Having now focused attention on a single number, which did decline and predictably for the wrong reasons, the Federal Reserve started looking at all the other numbers to see if there was any validation of their growth hypothesis. This is an age-old trick of central bankers (see Cult vogue sucks in central bankers, Asia Times Online, September 6, 2013). to find data that suits the main thesis, but as it happened for every bit of data that helped (eg industrial production) there were three others that failed to support the thesis (claims, inflation, housing starts).
The L-word
I have long suspected that the primary motivation for Bernanke to begin the taper was the L-word. No, not what you are thinking, but LEGACY. Despite being a mediocre economist with no real-world knowledge but who somehow managed to climb the corridors of power to the stratospheric heights of the Fed chairman Bernanke probably had enough personal humility to appreciate that his monetary policies had been a complete failure for their intended use - to improve economic growth - while creating longer-term risks.
Not wanting to face the same criticism as his predecessor Alan Greenspan did when he opened the flood gates of liquidity to counter September 11, thereby sowing the seeds of the financial crisis, Bernanke figured out that a gentle withdrawal of the QE would be his best legacy. Sure, stunning growth in the markets would stop, and the economy would probably slow, but he would have had the satisfaction of leaving the job with a legacy of low inflation, moderate growth and reasonable economic confidence.
At least, that was the plan.
Instead, as discussed above, the combination of QE with ultra-loose fiscal policies including welfare grants helped to decrease labor force participation in the US as people just lost motivation to consider employment. Rising asset prices, particularly in the housing sector - a direct result of QE - probably helped to reduce the urgency of looking for a job while the effects of the new healthcare laws may well have been to reduce full-time employment opportunities as employers had insufficient confidence in their future outlook to make such commitments.
In that respect, the new US healthcare law probably created the same unintended consequences as the French labor week laws of the last decade did - the original intention was to increase employment by limiting each worker to 35 hours, but this rebounded on the government as employers didn't want to hire more workers just making do with 35 hours a week, pushing the French towards long-term temporary employment whilst leaving the overall unemployment at 10%.
Thus the effects of the QE - as I have argued in previous articles cited above - was fundamentally negative for the economy, as employment generation seems to have stopped dead in its tracks even as the other much-lauded improvements such as in housing starts that helped spark optimism now appear to be reversing, if ever so slowly.
It was in this context that Bernanke's legacy efforts have faltered as the absence of data support rendered his plans futile. He shall thus exit the Fed as the chairman who stoked asset bubbles and created longer-term risks for the financial markets and the US economy. Eerily, that is the exact legacy of his predecessor Greenspan and the very legacy he wished to avoid.
Reversing Keynesian follies
A more courageous course of action would have been to acknowledge the failures of Keynesian measures and sow the seeds for an intellectual reversal at the rate-setting Federal Open Market Committee (FOMC) going forward. Showing that while the Federal Reserve had printed trillions out of thin air and become the largest buyer of US government debt over the last 12 months there had been no specific improvements in the underlying economy, he could have cited the longer-term policy risks.
In the context of the US government heading to yet another shutdown next month as the two political parties jostle for attention whilst offering no fundamentally different views on tackling the US fiscal deficit, the FOMC could have helped to awaken bond vigilantes to move the argument towards fiscal rectitude by withdrawing QE completely.
From a game theory perspective, Bernanke had nothing to lose - he was out of a job anyway - so very clearly he could have moved the FOMC in that direction. Instead, his efforts seem to have been scuttled by the current front-runner for his post, Fed vice chairperson Janet Yellen.
That then is the worst part of Bernanke's legacy - not only did he fail to do his job, and instead imposed significant economic and financial risks, in the end he wasn't able to get his way within the Federal Reserve, being outmaneuvered by his putative successor.
I have never been a fan of Ben Bernanke - see Forget Spitzer, fire Bernanke, Asia Times Online, March 15, 2008 - but even with my low expectations, it must be admitted that Bernanke failed on all measures as Fed chairman.
(Copyright 2013 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
