(What’s Left of) Our Economy: Bernanke Flunks Crisis History 101

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Ben Bernanke, bubble decade, bubbles, Federal Reserve, finance, Financial Crisis, Great Recession, Lehman Brothers, monetary policy, recovery, regulation, Wall Street, zero interest rate policy, ZIRP, {What's Left of) Our Economy

Because America is unlikely to avoid a rerun of the last financial crisis and recession without recognizing why they broke out in the first place, it can’t be good news that former Fed Chair Ben Bernanke still apparently hasn’t learned the main lesson of this near-catastrophe (and its still punishing aftermath): The crisis was rooted ultimately not in failures of the American financial system, but in weaknesses in the real economy that remain largely neglected.

I say “apparently” because this judgment is based on interviews Bernanke has granted to tout his new memoir on the crisis, and I haven’t read the volume. But it must be significant that both Bernanke and the leading financial journalists who questioned him have concentrated exclusively on the role played by Wall Street’s behavior and structures on the one hand, and lax regulation on the other, in nearly destroying the global economy. No attention whatever has been paid to the deteriorating ability of the Main Street economy to generate adequate levels of real wealth and income; to decisions made going back to the early 2000s to mask these deficiencies with crackpot credit-creation practices; or to the reckless lending and investment patterns to which this artificial credit glut led.

Not that Bernanke is the last word in crisis-ology. Yes, he spearheaded Washington’s efforts to contain the meltdown and spark recovery. But since his tenure at the central bank began in 2002, just about when the bubbles began inflating, and his Chairmanship began in 2006, just before they started bursting, he clearly was as much part of the problem as he’s been part of what’s so far passed for a solution. So his memoir is obviously an opportunity for reputation-burnishing. But finance has so completely dominated America’s views of the crisis and its origins that Bernanke’s perspective can’t simply be dismissed as self-serving.

Here’s a typical Bernanke comment presenting his view that the crisis was rooted in a panic in the unregulated, uninsured non-bank portion of the financial system that had grown so large that it became capable of endangering an otherwise healthy non-financial economy:

“The previous six months [before Lehman Brothers failed], the economy had been growing, house prices had fallen moderately. After Lehman, the economy just went into a death spiral. The fourth quarter of 2008 and the first quarter of 2009 was among the sharpest declines in the economy in U.S. history. Once the crisis went into a new gear, house prices started falling more quickly, and that had a feedback mechanism. Absent the broad-based panic that froze credit markets, caused asset prices to drop sharply and punctured confidence, we wouldn’t have had nearly so bad a recession.”

Bernanke has even appeared to deny that the economy during the previous decade was bubble-ized by overly easy Fed monetary policy. Asked whether the central bank had kept interest rates too low for too long – in fact long after the shallow recession of 2001 had ended – Bernanke responded:

“The first part of a response is to ask whether monetary policy was, in fact, a major contributor to the housing bubble and all that happened. Serious studies that look at it don’t find that to be the case. People such as Bob Shiller [a Nobel laureate currently serving as a Sterling professor of economics at Yale University], who has a lot of credibility on this topic, says that: it wasn’t monetary policy at all; it came from a mania, a psychological phenomenon, that took off from the tech boom and moved into housing.”

Here’s the immensely big picture that Bernanke is missing. The 2001 to 2007 economy was indeed growing, but the growth was energetically propped up by artificial – and, as it turned out, completely unsustainable – government stimulus. In fact, as shown in this (admittedly complicated) chart I made up while that previous recovery was proceeding, the federal funds rate – the short-term rate directly controlled by the Fed – had been plunged to multi-decade lows during that period, whether in inflation-adjusted or current dollar terms. At the same time, within a few short years, George W. Bush’s administration and the Congresses it worked with drove the federal budget from its biggest surplus in decades as a share of the total economy into deep deficit.

But did this unprecedented peacetime stimulus result in unprecedented peacetime growth? As the chart shows, anything but. And the discrepancy between Washington’s herculean efforts and the the economy’s mediocre results could not have made clearer that the nation’s engines of real (not financial) wealth creation, and thus real prosperity, had broken down.

As I’ve written repeatedly, American leaders could have responded with programs to strengthen that real economy, and therefore the real spending power of American workers. Instead, they tried to create the illusion of prosperity by enabling consumer spending that was not remotely justified by consumer incomes.

Fast forward to 2015, and despite the literally trillions of dollars of stimulus poured into the economy by the Fed under Bernanke and his successor, Janet Yellen, U.S. incomes continue to lag and the current recovery has seen even weaker growth than that of the bubble decade. It’s true, as Bernanke and others have argued, that expansion today is being slowed by a significant reduction in federal deficits. But it’s even more important to recognize that the economy will never truly heal unless the private sector leads. And let’s not forget that, thanks to the zero interest rate policy put in effect by Bernanke’s Fed in December, 2008, credit in America has never been cheaper.

Bernanke by no means deserves all or even most of the blame for the nation’s recent economic malaise. The last time I checked, the president and Members of Congress have been cashing paychecks all this time as well. But since leaving the Fed last year, Bernanke has been outspoken enough to make clear his ambition to remain a major economic voice. Judging from his take on why the financial crisis broke out, however, he doesn’t have much of value to teach.

(What’s Left of) Our Economy: Despite Marriage Equality Ruling, it’s Still the Economy….

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China, debt, euro, Eurozone, Financial Crisis, gay marriage, Great Recession, Greece, Lehman Brothers, LGBT, marriage equality, Obergefell vs Hodges, political correctness, Puerto Rico, punditocracy, recovery, stock market bubble, Supreme Court, {What's Left of) Our Economy

For the last two days I’ve been commenting on social issues – kind of a departure from my usual focus on economics and foreign policy, but worth doing as I saw it because the Supreme Court’s marriage equality raised so many issues that are both intrinsically interesting to me, and that bear importantly on the nature of our American society and political community. Over the last twenty-four hours, though, have come reminders – in the form of the (seemingly) climaxing Greece crisis and the deflation of China’s stock market bubble – that if the country doesn’t get its economics and finances right, none of that’s going to matter much.

Not that you would have gotten any sense of that from the major TV and cable talk shows yesterday. I saw every one of them except for CNN’s version, and I don’t believe the words “Greece” or “China” were even uttered. The Court’s Obamacare ruling got a fair amount of air time – but not because it will crucially impact a huge and growing share of our economy. Instead, the focus was on the decision as one sign of what a terrific week the president enjoyed, and what a pickle this (supposedly) creates for Republicans.

As the Beltway-centric punditocracy saw it, the mega-story was marriage equality – which should make clear that its worldview is grossly distorted by its cloistered collective life inside a media (and connected academic-arts-entertainment) bubble in which gays are robustly represented. After all, though the Obergefell vs Hodges ruling was a major social and cultural landmark for Americans, and will dramatically affect LGBT citizens, the latter comprise less than four percent of the U.S. population according to the best estimates. So it’s time to curb at least some of the euphoria touched off by Obergefell outside the LGBT community.

As for the alarm bells that have been ringing: First, many Americans who aren’t straight won’t choose marriage in the first place, much less child rearing. What of worries that the decision will set off an explosion of other kinds of nontraditional marriages, and foster the kind of child abuse strongly linked with polygamy? That very danger will naturally create a firewall against such units adopting or having test-tube kids that simply can’t be justified for LGBT couples and the loving, responsible parenting so many have been providing (and that we’re not seeing from too many traditionally married couples).

Nor do I see any threat to freedom of religion or conscience. If you didn’t approve of non-traditional marriage before the Court ruled, you’re just as free to disapprove today, and to express this disapproval. Your place of worship is just as free to preach against it, as will religious and other private schools. Businesses that oppose it will continue to be free to refuse to provide goods or services that would require them to participate or be present at weddings or other ceremonies or events they abhor. But they will rightly be required to serve LGBT customers at their place of business – including public officials who issue marriage licenses. If your faith now prevents you from signing forms that authorize LGBT couples to wed, you’re in the wrong job.

I can sympathize with marriage equality critics who are uncomfortable with the idea that LGBT Americans will assume a higher profile in the nation’s daily life, and who resent being labeled (often wrongly) as homophobes and, more broadly, “haters.” But ironically, they’re also sounding like the lefty political correctness types who favor turning offended sensibilities into a major criterion for limiting speech and other forms of free expression – or actual behavior. That’s the road to pervasive censorship and social controls that are thoroughly and dangerously un-American. Like the PC crowd, marriage equality critics are simply going to have to toughen their skins. In particular, if you want to air your views in public, rough pushback is often the price you pay. P.S. If you have real faith in your convictions, it shouldn’t be such a big deal.

Meanwhile, the future of the world’s biggest currency area – the Eurozone – is completely up in the air over the Greece crisis, and most of the world’s major private sector financial institutions (including America’s) are exposed directly or indirectly. Moreover, in the world’s second largest national economy, one of the most mammoth stock market bubbles in recent history is deflating – and the emerging Chinese stock bust could burst other immense bubbles Beijing’s economic policies have helped inflate.

Not that I’m predicting imminent apocalypse, or even a new Lehman Brothers moment, from either development (or even combined with the distinct possibility of a debt default by Puerto Rico). But when I think of how further national and global financial instability could affect an already under-performing, heavily indebted U.S. economy, and compare that with the fallout from the marriage equality decision, it seems clear that everyone should start leaving Obergefell in the rear-view mirror.