Time Magazine's Person of the Year, Ben Bernanke, is heralded as the savior of the US economy. But the Fed chairman is actually the real villain of the pieceby Dean Baker / December 16, 2009 / Leave a comment
Bernanke: heralded as the savior of the US economy while congress dithered Prospect’s 2009 public intellectuals list contains many crimes against good sense. It was obviously right to include Paul Krugman, Robert Shiller, Elizabeth Warren and several others on the list. Nonetheless, the judges have cleaved to the conventional wisdom and nowhere more than when rewarding our failed central bankers. Mervyn King is bad enough, but the real villain included here is the current chairman of the US Federal Reserve, Ben Bernanke—the same mistake Time Magazine now seems to have made with their choice for Person of the Year.
Anyone who really understood our current financial crisis couldn’t include him. I view the economic situation as first and foremost a collapse of a housing bubble, with the financial aspects being very much secondary. Today, America is sitting on around 10 per cent unemployment, mostly because we lost $500bn in annual demand in residential construction, and then another $500bn in annual consumption as a result of a drop in consumption, driven by the lost $6 trillion in housing wealth.
Throw in the collapse of a non-residential real estate bubble (another $200 bn) and you have a $1.2bn decline in annual demand in an economy that is a bit larger than $14 trillion. Prospect’s judging panel claim that the only thing that mattered intellectually in 2009 was financial reform—figuring out “what to do next.” But wait. None of this economic loss has anything to do with the financial crisis. So how can that be true?
Nothing in the Federal Reserve’s bag of tricks can replace this lost demand—or at least not quickly. Bernanke failed to see the bubble in the first place. He felt that the Fed should not concern itself with asset bubbles, or call the attention of financial markets or the public to these bubbles by using its regulatory power to rein in lending, or explicitly using interest rates to target a bubble. His view was that bubbles come and go without having important effects on the economy. This is what puts him high on my list of villains, and should certainly knock him off anyone’s list of heroes.
It gets worse however. In so far as it does matter, I am not thrilled with his conduct in dealing with the financial crisis itself. Undoubtedly, it was right to flood the markets with liquidity—the downturn would have been much worse…