I am glad to see the Federal Reserve Chairman explaining the purpose of the Fed and justifying its actions. The institution has done a lot to try to stem the financial crisis, and it’s good to see the Chairman explaining why he is convinced that his policies will work.
In the coming years, we will see if Bernanke is correct that we can loan out large amounts of new money without experiencing severe inflation after the recession ends. I hope that he’s right.
I believe that various elements of fiscal, housing and tax policy were the primary creators of the perverse incentives that led to the housing bubble. I’m not convinced that a low fed funds rate was the primary cause of the bubble. For guidance in this area, I look to the experts.
There are only a few people around who have as much knowledge of monetary policy as Bernanke does. One of those people is Anna Schwartz, who co-authored A Monetary History of the United States with Milton Friedman. Bernanke agrees with Schwartz’s and Friedman’s assessment that the Federal Reserve helped trigger the Great Depression by accidentally contracting the money supply.
To quote an October 2008 Wall Street Journal interview with Schwartz:
Fed Chairman Ben Bernanke, of all people, should understand this, Ms. Schwartz says. In 2002, Mr. Bernanke, then a Federal Reserve Board governor, said in a speech in honor of Mr. Friedman’s 90th birthday, “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
Schwartz said that Bernanke is “fighting the last war” – that he is making the economy feel good by injecting cash, but that he isn’t solving long-term problems. Read the interview here.
Ben Bernanke is a highly educated economist (he has a Ph.D. in economics from MIT). Schwartz knows a lot about monetary policy. Who’s right? We’ll find out in the years to come, when we can look back and analyze what happened.
Even if expansive monetary policy really was a primary cause of the housing bubble, Bernanke has little reason to let big institutions fail. With the President on the war-path agains the private economy, and with market-distorting subsidies and regulations filling hundreds of pages of Congress’s recent legislation, the market would see serious obstacles to a quick recovery if Bernanke simply let bad debt die.
So because our federal legislators and our chief executive will not allow for a liquidation of bad debt, a quick but severe recession, and a full recovery, we face two scenarios. The first is a decade or so of stagnant growth, and the second is a depression. Because the level of stagnation depends upon how much of Obama’s leftist agenda is successfully implemented, Bernanke is right to try to save the banks. If he let them fail, the rest of the federal government would still be blocking the road to a quick recovery.