22nd March 2012
A man not fit to be a junior teacher thinks he is fit to plan America’s money and banking
Listen to the Bernanke:
Ben Bernanke gave the first lecture of his 4-part lecture series on "The Federal Reserve and the Financial Crisis" at George Washington University. The lecture has been roundly condemned for it exposes Bernanke’s deep ignorance. Not fit to be a minor school teacher of economics, he thinks he is fit to centrally plan and manage America's money and banking system.
Extracts from two comments on this lecture:
The Conceit of Central Bankers (by Greg Canavan)
Bernanke wastes no time in cracking the standard joke favoured by gold ignoramuses. That is, a whole lot of resources are wasted in digging gold up from South Africa or somewhere and putting it into another hole in a New York vault. Boom-tish!
He also says a problem with the gold standard is that when economic activity heats up, the money supply increases and interest rates go down – 'the reverse of what the central bank would normally do today'.
Bernanke needs to read Bastiat's What is Seen and What is Unseen. Bernanke sees the cost of the gold standard, but doesn't see the benefit. In this case, the benefit is having the market set the price of money, NOT central bankers. (So it's hardly surprising he chooses not to see that.)
Under a gold standard, when economic activity heats up, gold migrates to the growing economy. Because gold is money under a gold standard, the money supply increases, which pushes the price of money (the interest rate) down.
Bernanke thinks this is a bad thing. It's the opposite of what he'd do. That's why the world is in such a mess. But his thinking is completely wrong.
You see, Bernanke ignores the other side of the equation. If gold migrates to the growing economy, it is fleeing somewhere else. If gold pushes up the money supply and pushes the market rate of interest down in one country, it is contracting the money supply and forcing interest rates up in another country.
… the gold standard is a natural balancing mechanism imposing constant discipline on countries. It helps establish a market rate of interest, which bestows no favours on any special interest group…be it bankers, farmers, consumers or savers.
Bernanke thinks he can promote constant expansion by fiddling with the money supply. His perpetually low rates discourage saving and investment. They encourage consumption. He's doing precisely the opposite of what the market would do under a gold standard.
Is one person smarter than the collective wisdom of millions?
Anti-Bernanke (by George Selgin)
So like any central banker, and unlike better academic economists, Bernanke consistently portrays inflation, business cycles, financial crises, and asset price "bubbles" as things that happen because…well, the point is that there is generally no "because." These things just happen; central banks, on the other hand, exist to prevent them from happening, or to "mitigate" them once they happen, or perhaps (as in the case of "bubbles") to simply tolerate them, because they can't do any better than that.
In describing the historical origins of central banking, for instance, Bernanke makes no mention at all of the fiscal purpose of all of the earliest central banks–that is, of the fact that they were set up, not to combat inflation or crises or cycles but to provide financial relief to their sponsoring governments in return for monopoly privileges. He is thus able to steer clear of the thorny challenge of explaining just how it was that institutions established for function X happened to prove ideally suited for functions Y and Z, even though the latter functions never even entered the minds of the institutions' sponsors or designers!
Bernanke is able to overlook the important possibility that central banks' monopoly privileges–and their monopoly of paper currency especially–may have been a contributing cause of 19th-century financial instability.
Bernanke refers to Bagehot's work, but only to recite Bagehot's rules for last-resort lending. He thus allows all those innocent GWU students to suppose (as was surely his intent) that Bagehot considered central banking a jolly good thing. In fact, as anyone who actually reads Bagehot will see, he emphatically considered central banking–or what he called England's "one-reserve system" of banking–a very bad thing, best avoided in favor of a "natural" system, like Scotland's, in which numerous competing banks of issue are each responsible for maintaining their own cash reserves.
FALSE DATA/ FUDGING
He attributes the greater frequency of banking crisis in the post-Civil War U.S. than in England solely to the lack of a central bank in the former country, making one wish that some clever GWU student had interrupted him to observe that Canada and Scotland, despite also lacking central banks, each had far fewer crises than either the U.S. or England.
Because he entirely overlooks the role played by legal restrictions in destabilizing the pre-1914 U.S. financial system,
FALSE ATTRIBUTION AND EXAGGERATION
Bernanke refers listeners to Frank Capra's movie "It's a Wonderful Life." The impression left is one that ought to make any thinking person wonder how any bank ever managed to last for more than a few hours in those awful pre-deposit insurance days. That quite a few banks, and especially ones that could diversify through branching, did considerably better than that is of course a problem for the theory, though one Bernanke never mentions.
he never mentions the fact that Canada had no bank failures at all during the 1930s, despite having had no central bank until 1935, and no deposit insurance until many decades later.
TOTAL FUDGING OF DATA TO MISLEAD
And although Bernanke shows a chart depicting high U.S. bank failure rates in the years prior to the Fed's establishment, he cuts it off so that no one can observe how those failure rates increased after 1914.
Bernanke's discussion of the gold standard is perhaps the low point of a generally poor performance.
Do read these articles in full.