Duty calls for Congress
By Hossein Askari and Noureddine Krichene
United States congressional confirmation hearings over the appointment of Ben
Bernanke for another four-year term as chairman of the board of governors of
the Federal Reserve System - his current term ends on January 31 - are set for
December 3. It is now the Congress' turn to exercise its constitutional
prerogatives and hold meaningful hearings before reaching a decision.
President Barack Obama nominated Bernanke for another term earlier this year,
well ahead of schedule, ostensibly to "calm" the markets. In doing so, Obama
broke his often-quoted campaign promise for "change" - in this case for a clear
break from the George W Bush era's economic and financial policies.
Bernanke was the chairman of the Counsel of Economic Advisors during the Bush
administration and was a Bush appointee as the
chairman of the Fed. He was also one of the main, if not the main,
architect of the Bush administration's financial and economic policies. As a
Fed governor, and later as Fed chairman, Bernanke engineered about the most
expansionary episode of monetary policy in US history, rejecting calls for
restraint when unprecedented speculation in housing and out of control
financial speculation were underway.
A person's record has to matter. His policies turned out to be devastating for
the US economy and for the banking system, and they brought to a screeching
halt two decades of prosperity, replacing them with a dramatic fall in real
incomes, mass unemployment, millions of foreclosures, and continuing economic
despair for millions of Americans.
These policies have cost taxpayers trillions of dollars in bailout funds for
the banking system and have contributed to a rapid build-up of national debt,
and with much more debt to be piled on over the next 10 years. His imprudent
monetary policy and drive to print more and more money has deservedly earned
him the nickname "Ben the helicopter," a dubious distinction for a central
banker.
If Bernanke had been a prudent and a balanced policymaker, the US economy would
have continued along the growth path enjoyed during 1982-2000. His rushed move
in August 2007 to follow an overly aggressive policy has precipitated the worst
economic and financial crisis of the post-World War II era.
Most ironic, Obama has lauded chairman Bernanke for his track-record: "As an
expert on the causes of the Great Depression, I'm sure Ben never imagined that
he would be part of a team responsible for preventing another. But because of
his background, his temperament, his courage, and his creativity, that's
exactly what he has helped to achieve. And that is why I am re-appointing him
to another term as chairman of the Federal Reserve ... I want to congratulate
Ben on the work he's done this far, and wish him continued success in the hard
work ahead."
That Bernanke did not imagine in 2002-2007 he would be part of the team
responsible for preventing another Great Depression should be of concern for
Americans - having the most important financial institution headed by someone
who cannot foresee the consequences of his policies!
Bernanke did not lack creativity, however; he lacked monetary prudence. His
"courage" for pursuing the most lax monetary policy, pushing interest rates to
zero bound, spreading financial anarchy, and clearing the path for inflation,
unemployment and economic agony should be compared to former Fed chairman Paul
Volcker's courage for restoring money stability, and by pushing the federal
funds rate to 20% extricating the country from a decade-long two-digit
inflation and building a path for a long-term economic growth.
Obama noted: "Ben approached a financial system on the verge of collapse with
calm and wisdom; with bold action and outside-the-box thinking that has helped
put the brakes on our economic freefall."
Bernanke's wisdom and bold action may have saved the banking system from ruins,
but his policies played a crucial role in bringing about the financial meltdown
in the first place. Unfortunately, no wisdom and creativity could recover the
billions on billions of lost banking capital. It is gone forever. Besides
US$1.5 trillion in writedowns, the burden of losses has simply been shifted
from banks to taxpayers, pensioners, and working classes.
Pension funds have lost on average 25% of their assets, and retirees will have
to live with smaller pensions that will be additionally taxed by inflation that
is sure to be down the road. Bernanke saved Wall Street from free fall -
bailing some institutions out with payments of 100 cents on the dollar on
worthless loans - so its big banks could pay record bonuses on another day, but
he crushed taxpayers, pensioners, and workers.
Obama's reappointment of Bernanke was not a surprise. It appears to be an
integral part of the Obama administration's determination to carry on with Bush
policies on an even larger scale. Fiscal deficits have been pushed to
unprecedented levels, and are projected at a yearly 13% over the next four
years. Money injection is proceeding at a frightening rate and money supply is
expanding at 18% a year. Interest rates are being forced to near-zero bounds,
causing tremendous distortions and destruction of savings and capital.
The superinflation goal of the Obama administration will be well served by a
superinflationist Fed chairman. The Fed is intent, as it has been, to monetize
the fiscal deficits.
"We will continue to maintain a strong and independent Federal Reserve," said
Obama. Certainly, Bernanke's independent Fed fits perfectly into the Obama
administration's most extraordinary fiscal deficits. The end of the
Bush-Bernanke era has brought economic turmoil; spreading misery; an
intoxicated banking system; a housing sector suffering millions of
foreclosures; and mass unemployment in double-digit levels - "true"
unemployment (commonly referred to as "U-6", including those that have dropped
out of the labor force because of despair or who have only secured part-time
work) is at 17.5% and still rising.
Simple principles of monetary economics elaborated in the 16th century about
quantity of money have continued to elude the Fed and its supporters. The Fed
has been injecting billions of dollars into the economy. Yet how much
additional crude oil has been created by such money creation? The answer is
zero barrels. How much additional rice, corn, vegetables, and fruits have been
created by Bernanke's new money? Given limited land and other inputs,
additional production has been insignificant.
Although the Fed has always ignored food and energy inflation, yet prices of
food and energy products not surprisingly have doubled, tripled, and quadrupled
since Bernanke has became a key policymaker in the Fed. Such food inflation has
put 36 million Americans on food stamps. Since crude oil output would hardly
exceed 85 million barrels per day, the Fed's money printing will simply
translate into oil price inflation, already doubling this year. The same
applies for limited food output. Food prices will keep on rising.
"In essence, the present creation of money out of nothing by the banking
system, is similar - I do not hesitate to say it in order to make people
clearly realize what is at stake here - to the creation of money by
counterfeiters, so rightly condemned by law." So commented Nobel Prize winner
Maurice Allais. Bernanke's creativity in injecting unlimited dollar liquidity
is pure counterfeiting. Since a multi-fold rise of basic food and energy
product prices has been accompanied by stagnant or falling nominal wages,
Bernanke's actions have imposed a formidable tax and deteriorating nutrition on
millions of Americans, with one in eight Americans now going to bed hungry.
Besides ignoring the distortionary and inflationary effects of lax monetary
policy on food and energy products, Bernanke has been mistaken in his view that
the US economy suffers from deficient demand. By deploying the most aggressive
monetary policy, he wanted to repair a deficiency in demand. Such a view is
incongruous with the sizeable fiscal deficits and large and widening external
current account deficits, which averaged about 5-7% of gross domestic product
during 2005-2009. Ever-growing external deficits are clear proof that spending
has exceeded income and external savings have filled the gap. More monetary
expansion would simply mean more external deficits.
Bernanke was portrayed as an expert of the Great Depression. However, he is not
an experienced banker. Most of his career was in a classroom as a teacher.
There is no banking system in the world, no matter how perfectly capitalized,
regulated, and supervised, that could have survived the record low interest
rates pushed by the Fed during 2002-2005.
Extremely low interest rates expose even the best-regulated banks to two
unavoidable risks: a credit risk and an interest rate risk. Both risks have
fully materialized in 2007-2009 and have precipitated the collapse of the US
banking system. The credit risk has materialized through the meltdown of
subprime loans. The interest rate risk has materialized through the collapse of
asset prices and the value of asset-backed securities, commonly referred to as
toxic assets.
The current near zero interest rates will inevitably expose US banks to the
very credit and interest rates risks they have already suffered in the recent
past. John Maynard Keynes rightly pointed out that low interest rates would
cause prudent banks to hold liquidity and short-term riskless bonds.
Consequently, US banks have learned the hardest lessons and become resolved to
avoid both risks. They are accumulating excess reserves at amounts never seen
before and are essentially buying short-term government securities and making a
killing in the market.
By setting interest rates at near zero bound, Bernanke would like to achieve
strong and lasting growth. How can we ignore Japan's decade-long stagnation,
brought about by near zero interest rates?
Obama's policymakers have been mired in fallacies. They have been tempted by
money counterfeiting to exit from crises that were themselves brought about by
loose monetary policies. They have all along seen the Fed as the most important
body for economic management and creating employment in the economy. Such
misconceptions has led to the most extreme uncertainties in the economy and to
banking and exchange rates instabilities, and has fostered speculation.
The concept of safe central banking aimed at safeguarding money and bank safety
has long been abandoned in favor of central banking that manages economy and
employment. This misconception was deeply rooted in Bernanke's nomination
acceptance speech, when he asserted himself as a ubiquitous power that will
create growth and employment, stating: "I will work to the utmost of my
abilities to help provide a solid foundation for growth and prosperity."
He could not limit his power to that of a central banker who would only
stabilize money conditions, maintain a low rate of inflation to prevent social
inequities created by inflation, and devolve growth and employment to the real
economy.
Prosperity has ended with chairman Bernanke's cheap monetary policy. The crisis
is still unfolding. How he can provide a solid foundation for growth and
prosperity, which he has already compromised, in such an environment of loose
money and fiscal deficits remains a puzzle that only Bernanke and his
supporters can answer.
Four more years of the same ultra-expansionary fiscal and money policies can
only promote more financial disorder and will be far from conducive to lasting
economic and financial stability.
Far from reversing Bush era policies with "change", Obama has embraced Bush's
policies with injurious effects on the US and the world economy. His choice of
Bernanke for another four-year term will ensure an acceleration of the same
policies.
The Congress now has a solemn duty to look into Fed policies and open up the
central bank's balance sheet. Congress must also take this opportunity to
examine how the financial bailouts were implemented and whether some
institutions received sweetheart deals at the expense of the taxpayer and the
nation.
Congress must act diligently and not be a rubber stamp for the administration.
Hossein Askari is professor of international business and international
affairs at George Washington University. Noureddine Krichene is an
economist at the International Monetary Fund and a former advisor, Islamic
Development Bank, Jeddah.
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