Bernanke's Race Against Time
Tea Party Economist
by Gary North: How
Not To Change America's Politics: Set Up a Public Policy Think Tank
Ben Bernanke's position as Chairman of the Board of Governors will
end on January 31, 2014. He is now in a race against time.
Will the American economy fall back into recession before then,
thereby negating the tripling of the monetary base under his chairmanship?
Will he get out before mass inflation rears its ugly head? (2) Will
he be able to pass on the Old Maid of price inflation, the way that
Alan Greenspan passed on the Old Maid of the Great Recession to
from a major liability: he is an academic. In the history of the
Federal Reserve, only three men who have held the position of Chairman
of the Board of Governors have had a PhD in economics.
ECONOMISTS AT THE HELM
One was Arthur
Burns, who served under Nixon, and therefore presided over the destruction
of the gold exchange standard, and who launched the worst phase
of price inflation in the history of peacetime America.
second was Alan Greenspan. He was not known as Dr. Greenspan,
which is good, because the conditions under which he received his
PhD have been under a cloud for years. There has never been a release
of his PhD dissertation. A purloined version has circulated, and
the thing is little more than a series of articles. It does not
have anything like the academic character of a standard PhD dissertation.
is the third. He was a professor of economics at Princeton University.
This is a major university. There is no question that he has strong
academic credentials. His academic credentials are greater than
the credentials held by any previous Federal Reserve Chairman. This
is why he is a sitting duck.
problem is that academic economists are protected by tenure from
the realities of the capital markets. Nobody can fire them. They
are not held accountable for anything they say. They are in control
over the grading process. Students do not give them any back talk.
If another economist challenges them, the other economist is writing
in some obscure journal, and the public has no interest in the debate.
So, the debates among economists take place in a rarefied world
in which economic reality rarely intrudes. When it does intrude,
it usually does so at the expense of the theories that are offered
in the standard academic journals.
never taught at a university. He was not strictly an academic. This
helped him. He covered himself with his famous "Greenspeak." He
admitted this on national TV while he was in office. The public
thought this was amusing. Obviously, so did he. Congress, officially
in charge of the Federal Reserve, never challenged him. He got a
to escape criticism by three methods when he speaks publicly: (1)
reviewing recent financial history at great length even though everyone
in the audience already knows this history; (2) adding footnotes
to bog down his critics in academic bilge; (3) mildly blaming Congress
for its deficits, on the assumption that Congress will do nothing
to balance the budget, and therefore the FED (and Bernanke) will
escape blame when the house of credit cards finally collapses.
should not be allowed anywhere near policy-making power. Yet there
is no policy-making in the field of economics that is more crucial
to an economy than the policy-making at the nation's central bank.
Of all places where you do not want a man with a PhD to preside
over the institution, the central bank is that institution.
into power in February 2006, following the tenure of the most famous
Federal Reserve Chairman ever. Not even Paul Volcker was as famous
as Greenspan, because Volcker served a shorter term. He left before
cable news had become dominant. There were no financial news channels.
There was no YouTube.
I said from
the beginning of his term that the recession crisis would hit under
Bernanke's administration, and so it did.
In late April 2006, I wrote this:
Reserve must walk the tightrope between price inflation on the
one side, which will raise long-term interest rates and mortgage
rates, threatening to pop the housing bubble, and a recession
on the other side. The yield curve almost inverted in early April,
2006. This is the traditional harbinger of a recession. That would
also threaten the housing bubble. . . .
of the U.S. money supply, beginning in late 2000, created the
bubble condition of the housing market. The way to keep gold from
going up, other than selling large quantities, is to stabilize
the money supply. The FED actually began to follow this policy
in January, 2006. But if this policy is extended, the fiat money-induced
boom that began in 2001 will bust. Bernanke must find a way to
escape from the trap Alan Greenspan set for his successor. This
can be done, but only at the expense of a major recession. In
a Congressional election year, there is pressure on the FED not
to let this happen. . . .
FED DARES NOT STABILIZE MONEY
The FED will not stabilize the money supply for long. Bernanke
is famous for his speech in which he compared the FED to a helicopter
full of paper money. He is attempting to overcome that blunder
with tight money. But the result of tight money will be a recession.
Then it will be a depression. He knows this. He has hailed Milton
Friedman for having told the economists in 1963 that it was the
FED's deflationary policies that produced the great depression.
economics told me that the attempt by Greenspan to reduce the expansion
of the money supply would eventually produce a recession. He got
out in time. He was replaced by an academic who did not understand
Austrian economics, and who did not have a clue as to what was about
to hit the economy. No Federal Reserve Chairman has been as completely
blindsided by the economy as Ben Bernanke was in 2008.
the first Federal Reserve Chairman to receive widespread criticism
by the public. The main reason for this has been Ron Paul. The other
reason has been YouTube videos produced by people with an Austrian
school economic perspective. Peter Schiff has been very successful
in this regard.
Reserve is now under assault. It is not a direct assault on the
government. It is more like guerrilla warfare. The Federal Reserve
is the target of snipers who are well informed about economic theory
and policy. It is also the target of snipers who are not well informed,
but who are really angry at the state of the economy. The Federal
Reserve likes to promote itself as being the center of economic
policy-making, so it takes the blame for this economy.
a Keynesian. This means that he really does not understand how the
economy works. Worse than this, he made his reputation as an expert
on the Great Depression. This means that he is a pro-Roosevelt,
pro-inflation, pro-government, pro-regulation economist. I think
there is zero possibility that he will recognize the imminence of
the next crisis. He did not recognize the last one, so there is
no reason to believe he is going to recognize the next one.
Being an academic
economist, he does not know how to conduct himself verbally in the
highly competitive world of political rhetoric. He has had a free
ride all of his career. He has never been forced to interact with
either the market or Austrian economists.
communicate his ideas, because Keynesianism is incoherent. I am
not exaggerating. If you read John Maynard Keynes's famous book,
General Theory of Employment, Interest, and Money (1936),
you will see the extent to which he was utterly incoherent in that
book. This is in contrast to most of his other books. He was a very
clear writer when he wanted to be, so you can be sure that whenever
you read incoherent statements in anything written by Keynes, it
was because he was trying to cover up the fact that he did not understand
economic cause and effect.
an acolyte, Paul Samuelson, was equally incoherent in his Foundations
of Economic Analysis. Samuelson hid behind mathematical
formulas, so that the average reader did not expect to understand.
Neither did most of his academic peers. The book began with these
of analogies between central features of various theories implies
the existence of a general theory which underlies the particular
theories and unifies them with respect to those central features.
This fundamental principle of generalization by abstraction was
enunciated by the eminent American mathematician E. H. Moore more
than thirty years ago. It is the purpose of the pages that follow
to work out its implications for theoretical and applied economics.
It went downhill
from there. He got away with it. In economics departments, this
faculty saying has been true ever since: "Nobody ever got fired
for assigning Samuelson's Economics
or for not having read Foundations of Economic Analysis."
academicians think that incoherence is a benefit. They believe that
they can hide behind equations and verbosity to protect themselves
from the realities of both logic and the free market. They have
done this all their lives, and they are completely defenseless when
it comes to making clear whatever they are talking about, and to
be persuasive enough to be believed. These days they have lots of
criticism from people who are clear, who have an understanding of
economic cause-and-effect, and are able to state their position
in such a way that voters can understand what they are talking about.
This is why Ron Paul has inflicted so much damage on the Federal
Reserve. People can understand what he is talking about.
utterly defenseless. I assume that he is smart enough to know that
he is being beaten up by Ron Paul. Or maybe he is not that smart.
Maybe he has been shielded by academia so long that he thinks that
the opinions held by voters are irrelevant, and therefore he does
not need to confront them. This will doom his efforts when the economy
turns against him.
ERA OF PUBLIC SCRUTINY
We are living
in a time in which the failures of government are becoming obvious
to a growing minority of voters. The Federal Reserve is at the center
of these failures. It controls the central institution, meaning
banking, meaning money. Its mistakes are magnified throughout the
economy. Its mistakes are many. These mistakes can no longer be
concealed from intelligent voters.
have been tipped off by Ron Paul and YouTube to the fact that Bernanke
has feet of clay. They are no longer impressed by his academic smokescreen.
His footnotes, which are his vain attempt to cloak himself in bullet-proof
armor, do not accomplish this service. He does not know where to
hide in a crisis.
If you remember
what happened in late 2008, he was almost invisible. Well, not exactly
invisible, but inaudible. Hank Paulson did all the talking for them
both. Paulson understood confrontation and rhetoric. He knew how
to act as though he knew what he was talking about, which he did
not, but at least he gave the impression that he did. He completely
bamboozled Congress, which is not that difficult for somebody who
gives the impression of knowing what he is talking about. Paul Volcker
and Alan Greenspan did it for years.
Bernanke was like a timid mouse in the corner, and the capital markets
were the cat. He knew he was going to be eaten alive. He hid behind
Hank Paulson. He showed no initiative, no sign of self-confidence,
no awareness of how to conduct himself in the middle of a crisis
which his policies had created. He was to blame, to the extent that
he inherited the disaster left behind by Alan Greenspan. He was
holding the bag, and he did everything he could to make himself
silence in the face of looming disaster is not going to work ever
again. If there is another crisis, Congress will be screaming for
his head. So will the public. Admittedly, the mainstream media will
probably hold back, because the Federal Reserve is the heart, mind,
and soul of the control mechanism that the Establishment has over
the economy. The media will always give a free ride to the Chairman
of the Federal Reserve. But I do not think the faltering media will
be able to protect him next time.
escape when he leaves office in early 2014. Maybe the economy will
not be in a crisis. Maybe he can pass on the old maid, the way Greenspan
did to him. But that is his only legitimate hope.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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