FacebookTwitterGoogle+RedditEmail

The Reappointment of Bernanke

by DEAN BAKER

The world’s central bankers met in Jackson Hole last weekend for their annual gathering. Undoubtedly one of the main topics of discussion was the reappointment of Ben Bernanke as Federal Reserve Board chairman. His reappointment would almost certainly win the support of the vast majority of attendees. This should raise serious concerns.

This is the same group that in 2005 devoted their meeting to an Alan Greenspan retrospective (seriously). The world’s leading thinkers and practitioners of monetary policy debated whether Alan Greenspan was the greatest central banker of all time.

I’m not sure how the polling on this question turned out, but four years later the world is facing the worst economic downturn since the Great Depression because of Alan Greenspan’s failed monetary policy. Greenspan either did not recognize an $8 trillion housing bubble, or did not think it was a big enough deal to demand his attention. The collapse of this bubble gave us the financial panics of 2008 and, more importantly, led to the falloff in demand that produced the downturn.

None of this should have been a surprise to people who understand monetary policy. The housing bubble should have been easy to recognize. There was a 100-year long trend in which nationwide house prices in the United States had just tracked the overall rate of inflation. At the peak of the bubble in 2006, house prices had risen by more than 70 percent after adjusting for inflation.

There were no changes in the fundamentals of the supply or demand of housing that could provide a remotely plausible explanation for this unprecedented run-up in prices. Furthermore, rents were not outpacing inflation. If the run-up in house prices was being driven by fundamentals, then there should have been at least some upward pressure on prices in the rental market.

The bubble was very evidently driving the economy by the time of Greenspanfest ’05. The residential construction sector had expanded to more than 6 percent of GDP, an increase of more than 2 percentage points (@$300 billion a year) from its normal level. The $8 trillion in housing bubble wealth was also propelling consumption. Assuming a wealth effect of 6 cents on the dollar, the bubble wealth was generating close to $500 billion a year in increased consumption.

It was inevitable that both the construction and consumption demand would disappear when the bubble burst. What did Greenspan and his acolytes think would make up this lost demand?

Even the financial crisis was entirely predictable although the exact course of events could not be known to someone who lacked access to the information held by central bankers. Housing is always a highly leveraged asset and it was no secret that it had become much more so during the bubble years.

Down payment requirements were thrown out the door, as homebuyers often purchased homes with no money down; in many cases even borrowing more than the appraised value of a bubble-inflated house price. The explosion of subprime and Alt-A loans was also not classified information. How could any economist have been surprised by the flood of defaults and the resulting stress on banks following the collapse of the bubble? This was as predictable as the sunset at the end of the day.

But the attendees of GreenspanFest ’05, most of whom are back to attend GreenspanFest ’09, apparently were surprised. Remarkably, almost none of the attendees suffered any consequences from the failure to see the largest financial bubble in the history of the world. In the United States alone, 25 million people are either unemployed or underemployed in large part because of the failure of the GreenspanFest attendees to do their job. Yet, the GreenspanFest attendees are not among those fearing unemployment. The official slogan of GreenspanFest ’09 is: “who could have known?”

Ben Bernanke has moved very effectively in the last year to prevent the collapse of the financial system. However, even in this area there have been serious issues of unnecessary secrecy and failed regulation. (Isn’t Goldman Sachs supposed to be a bank holding company now?)

But more importantly, Bernanke is waist deep in responsibility for this mess. Before becoming Fed chairman in January of 2006 he had served on the Board of Governors since 2002, and had been head of President Bush’s Council of Economic Advisors from June of 2005. After Greenspan, there was probably no one else better positioned to combat the bubble.

The attendees of GreenspanFest ’09 may not want to be so rude as to discuss their culpability for this disaster, but that should not prevent the rest of us from raising the topic. It would be an insult to the tens of millions of people who have lost their jobs, their homes, and/or their life savings to see Bernanke reappointed. Failure should have consequences, even for central bank chairmen.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

This column was originally published by The Guardian.

 

 

 

 

 

 

 

 

 

 

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
December 03, 2016
Friday - Sunday
Dave Lindorff
Is Trump’s Idea To Fix the ‘Rigged System’ by Appointing Crooks Who’ve Played It?
Weekend Edition
December 02, 2016
Friday - Sunday
Jeffrey St. Clair
Roaming Charges: The CIA’s Plots to Kill Castro
Paul Street
The Iron Heel at Home: Force Matters
Pam Martens - Russ Martens
Timberg’s Tale: Washington Post Reporter Spreads Blacklist of Independent Journalist Sites
Andrew Levine
Must We Now Rethink the Hillary Question? Absolutely, Not
Joshua Frank
CounterPunch as Russian Propagandists: the Washington Post’s Shallow Smear
David Rosen
The Return of HUAC?
Rob Urie
Race and Class in Trump’s America
Patrick Cockburn
Why Everything You’ve Read About Syria and Iraq Could be Wrong
Caroline Hurley
Anatomy of a Nationalist
Ayesha Khan
A Muslim Woman’s Reflections on Trump’s Misogyny
Michael Hudson – Steve Keen
Rebel Economists on the Historical Path to a Global Recovery
Russell Mokhiber
Sanders Single Payer and Death by Democrat
Roger Harris
The Triumph of Trump and the Specter of Fascism
Steve Horn
Donald Trump’s Swamp: Meet Ten Potential Energy and Climate Cabinet Picks and the Pickers
Louis Proyect
Deepening Contradictions: Identity Politics and Steelworkers
Ralph Nader
Trump and His Betraying Makeover
Stephen Kimber
The Media’s Abysmal Coverage of Castro’s Death
Dan Bacher
WSPA: The West’s Most Powerful Corporate Lobbying Group
Nile Bowie
Will Trump backpedal on the Trans-Pacific Partnership?
Ron Ridenour
Fidel’s Death Brings Forth Great and Sad Memories
Missy Comley Beattie
By Invitation Only
Fred Gardner
Sword of Damocles: Pot Partisans Fear Trump’s DOJ
Renee Parsons
Obama and Propornot
Dean Baker
Cash and Carrier: Trump and Pence Put on a Show
Jack Rasmus
Taming Trump: From Faux Left to Faux Right Populism
Ron Jacobs
Selling Racism—A Lesson From Pretoria
Julian Vigo
The Hijos of Buenos Aires:  When Identity is Political
Matthew Vernon Whalan
Obama’s Legacy
Subcomandante Insurgente Galeano
By Way of Prologue: On How We Arrived at the Watchtower and What We Saw from There
Aidan O'Brien
Fidel and Spain: A Tale of Right and Wrong
Carol Dansereau
Stop Groveling! How to Thwart Trump and Save the World
Kim Nicolini
Moonlight, The Movie
Evan Jones
Behind GE’s Takeover of Alstom Energy
James A Haught
White Evangelicals are Fading, Powerful, Baffling
Barbara Moroncini
Protests and Their Others
Christopher Brauchli
Parallel Lives: Trump and Temer
Joseph Natoli
The Winds at Their Backs
Cesar Chelala
Poverty is Not Only an Ignored Word
David Swanson
75 Years of Pearl Harbor Lies
Alex Jensen
The Great Deceleration
Nyla Ali Khan
When Faith is the Legacy of One’s Upbringing
Gilbert Mercier
Trump Win: Paradigm Shift or Status Quo?
Stephen Martin
From ‘Too Big to Fail’ to ‘Too Big to Lie’: the End Game of Corporatist Globalization.
Charles R. Larson
Review: Emma Jane Kirby’s “The Optician of Lampedusa”
FacebookTwitterGoogle+RedditEmail