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Business as Usual

The Resurrection of Ben Bernanke

by ROB URIE

An effort is underway by establishment economists to legitimate the Bush and Obama administrations’ bank bailouts and the Federal Reserve’s subsequent efforts to boost financial asset prices as necessary actions that saved the economies of the capitalist West. Liberal luminaries such as Princeton University’s Paul Krugman and MIT’s Robert Solow have come to the defense of Fed Chair Ben Bernanke in particular, and Treasury Secretaries Henry Paulson and Timothy Geithner by inference, to assert what could have been a catastrophe reminiscent of the Great Depression was averted through well-conceived public policies and that Mr. Bernanke’s economic prescriptions have added to ‘our’ understanding of how to manage financial crises.

This is not to suggest enthusiastic criticism of government and Fed actions, or rather inactions, have not been forthcoming. Mr. Krugman in particular has argued that far greater efforts to revive the still moribund economy are needed including fiscal stimulus and more aggressive monetary policies from the Fed. But the general sense conveyed is the government and Fed actions taken were legitimate and beneficial to ‘the economy.’ In this formulation it is the ill fortune of those who haven’t benefited that relegates them to the ether of ‘the economy’ as defined by mainstream economists and official statistics. Given the terms of this ‘discussion,’ a new Great Depression and relative prosperity can coexist for a time without contradicting establishment economist’s claims of (limited) economic revival.

The language of fortune and misfortune suggest nature’s caprice, the luck of the draw, the unpredictable outcomes of random events. However, ‘market’ economics requires a benevolent and prescient nature—one that links ‘natural’ endowments—intelligence, imagination, ambition and talent, to ‘nature’s’ rewards. It may be ‘unfortunate’ that bankers, corporate executives and inheritance rentiers have been the only beneficiaries of government and Fed policies to date, but only to the extent everyone isn’t a banker, corporate executive or trust-fund baby. The great economic tragedy in this theory is policy ‘mistakes’ caused temporary periods where the benevolence of markets was overwhelmed by accidents of history—random events with improbable links to human actions, institutions and historical relations.

Evidence of class struggle is empty conspiracy at the conferences and forums where educated (mostly) men in suits get to know each other’s ‘human’ side. The apolitical careerists of Washington and New York, Chicago and Des Moines, long ago concluded ‘its just business,’ the intersection of economic and political power an artifact of their natural distribution. For those too dull to intuit the facts of nature economists have mathematical models, and for the truly dull Powerpoint presentations, that explain it all. Sure, the Federal Reserve created three trillion dollars and used it to buy financial assets from connected insiders at above market prices, but how did they get to be connected insiders in the first place? And yes, the bank bailouts were odious, but imagine the consequences if J.P. Morgan’s Payday Lending subsidiaries could no longer supply banking services to ‘under-banked’ communities?

Long disappeared are the reports of Goldman Sachs CEO Lloyd Blankfein being the only banker in the room with Henry Paulson, Timothy Geithner and Ben Bernanke while plans were being made to ‘save’ insurer AIG that just happened to put $13 billion into Goldman Sachs’ pocket. And the New York Fed’s Stephen Friedman, a member of Goldman’s Board while he was orchestrating the firm’s bailout, was given a waiver to buy more Goldman stock after determining the terms of the bailout. And what of the AIG ‘bankers’ who were kept on multi-million dollar ‘retainers’ for their unique knowledge of how to destroy their business? And what of the AIG executives who, after being bailed out, insisted (and received) on being paid their bonuses in cash because they believed company stock to be worthless? These and infinite other acts were larcenies most likely, unfortunate lapses in otherwise honest efforts to serve the public weal under circumstances that by sheer coincidence limited the utility of policing and prosecuting those of a certain class.

Within months the intersection of cynicism and rank hallucination produced the storyline amongst New York bankers that the government created the mortgage ‘crisis’ by forcing them to lend money to poor people under the CRA (Community Re-investment Act). Government incompetence led Lehman Brothers to fail (from bad CRA loans) that in turn led to financial panic. The only way the government could undo the damage its own policies had caused was to give the banks enough money to restore them to their prior condition. For their temporary discomfort the government owed bankers the bailouts and bonuses. And now that it’s been proven government regulations caused the crisis, it’s time to get government out of the business of regulating banks. Lest this storyline read as cynical and nonsensical as it actually is, what precisely is the counter-narrative from Washington?

The technocratic argument from ‘responsible’ economists is the Federal Reserve has used its limited toolset to some success. Normal Fed policy in a recession is to lower interest rates, thereby lowering borrowing costs, and with it, the ‘hurdle’ rate at which borrowing money to invest in economic production makes sense. When economic recession is in fact depression, as is the current case, interest rates can’t be lowered enough to spur investment because the hurdle rate is negative—companies would need to be paid to borrow money for it to make economic sense, and it is beyond the Fed’s ability to drive market lending rates below zero (for banks to pay companies to borrow). Given the Fed can’t affect fiscal policy and wouldn’t try to persuade the banks they are tasked with ‘saving’ to pay companies to borrow money, non-traditional tools like Quantitative Easing (QE) where the Fed creates money to buy financial assets are what is left.

However, recall for a moment that Fed Chair Ben Bernanke was in the room as the dirtiest of the bank bailout deals were being engineered. These weren’t deals to ‘save the economy,’ as establishment economists would have it, they were to enrich the same corrupt insiders who had looted the economy for their own personal benefit. Mr. Bernanke proceeded to lie repeatedly and in great detail about what it was the Fed was doing and subsequent forced disclosures demonstrated this to be the case. Fed defenders argue this was all necessary to serve the public—full disclosure would have hindered the very policies the Fed was promoting. This argument would have more weight if Fed policies had benefited the broad public. But from unemployment and income distribution data that is a hard argument to make. Who clearly benefited however were the bankers for whom bailouts were engineered, the corporate executives whose compensation comes from newly recovered stock options and the few hundred families who own most of the stock market.

The economic models used by mainstream defenders of Fed policies are by design blind to their adverse consequences in two significant ways—they only count ‘real’ price inflation while ignoring financial asset inflation and they misrepresent banks as financial intermediaries rather than as credit creators. In the first case QE, the creation of money to buy financial assets at above market prices from financial firms, removes garbage assets from bank balance sheets and removes other interest bearing assets from circulation. This creates a ‘diffusion’ process where the prices of remaining assets are bid up. In the case of credit creation, banks only lose their capacity to create credit when they are restrained by functional insolvency. The growth of (mostly foreign) bank reserves at the Fed coincident with QE illustrates a dearth of demand for credit. And in ‘balance-sheet’ recessions banks are likely to see a decade or so of low loan demand.

To recap, Fed Chair Ben Bernanke helped engineer some of the dirtiest deals in Wall Street history, can’t get firms to borrow with ‘standard’ Fed policies because of the negative hurdle rate (‘zero lower bound’), is managing with QE to build bank reserves that aren’t needed to ‘spur’ lending that isn’t needed, and has managed to send financial assets owned by banks, corporate executives and trust fund babies much higher. These acts all put money directly into the hands of the West’s plutocrats while the only demonstration of benefit to anyone else comes from the assertion the economy ‘would have been worse’ from the economists whose mainstream standing is a function of keeping official discourse comfortable for middle-aged white guys in expensive suits.

In this process one group of people, the very wealthy, used the political power purchased with their wealth to assure the institutions with the capacity to boost their fortunes did exactly that through insider financial deals and policies to send the stock market they own higher. The government policies that could likewise give money directly to victims of the economy crashed by the banks via government jobs programs, Federal teaching grants, arts grants etc. are missing in action and cutting government spending through ‘austerity’ is the policy choice instead. Ben Bernanke and Fed defenders can continue to argue the broad circumstance is a terrible accident, a series of ‘policy missteps,’ but their singular direction leaves alternate interpretations to only the dullest among us—the Federal Reserve is a tool being used by plutocrats for their own benefit in an epic class struggle.

But Fed defenders certainly take issue with this characterization. The ‘profession’ of economics traded relevance for the rhetorical guise of ‘apolitical’ technocracy a century ago. Herr Bernanke’s actions as seen through graduate economics departments are the manly work of a technocratic manly man where moral clarity sometimes takes a back seat to effective policy. That the deals he helped engineer to benefit Wall Street insiders would appear suspect to child pornography rings and to the meth dealers working local elementary schools relates today’s ruling class to its predecessors through history. The Fed’s back-room deals may have precedence but they are profoundly undemocratic and in their class dimensions, anti-democratic. Only by separating politics from economics can economists endorse policies with specific political effects under the illusion they are economically neutral.

The consensus in the mainstream commentariat of some years now is that money is corrupting politics. A quick speculation is both Paul Krugman and Robert Solow agree with this consensus. The ‘Citizens United’ Supreme Court ruling that corporations are people and campaign contributions are protected speech directly ties accumulated wealth to political outcomes through campaign contributions. However, mainstream economists’ practice of using ‘models’ to understand economic outcomes irrespective of political consequences is shown to be radically ideological when economic outcomes are tied to political outcomes in the world. It appears a non sequitur that Fed policies to benefit the wealthy are a form of class warfare because there is no tie in their economic models between the political consequences of benefiting the wealthy and the diminished lot of everyone else. But outside of the studied irrelevance of mainstream economics, how hard is this to see?

The premise any policies of recent years with respect to the financial crisis are determinant requires a questionable endpoint. The looting of the Savings & Loans in the 1980s was different from the Dot-com bubble of the 1990s and the financial crash and Great Recession of the 2000s. However, their economic consequences—long ‘jobless’ recoveries and an increasingly dysfunctional ‘real’ economy are typical of crises of capitalism in financialized economies. As long as this epic persists with Fed policies behind each ‘resurrection’ the Fed owns the epic.  The economists sitting in forums congratulating the ‘economics profession’ for effective policies did so prior to the onset of every crisis of recent decades. Their ability to miss the proverbial ‘forest for the trees’ would be awe inspiring if they weren’t such a useful tool for ruling class interests.

For two decades former Fed Chair Alan Greenspan was perceived as a wise technocrat. It was the financial crisis and Great Recession that laid bare the political-economic agenda behind his alleged technocratic skill. Still, the discursive practice amongst the economic mainstream is to treat separately his policies as Fed Chairman and his radically ideological (‘faith based’) capitalist agenda. Current Fed Chair Ben Bernanke has carried forward this political agenda adding complexity and a new fashion of technocratic rhetoric. Mr. Bernanke’s policies are no more ‘mistakes’ than were Alan Greenspan’s. They benefit the rich and powerful and the best retort being offered is they do so by accident. That this explanation makes sense to anyone demonstrates to ‘special’ place in history the West in general, and academic economics in particular, currently occupies.

Rob Urie is an artist and political economist in New York