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Tags: dan | mangru | ben | gambler

Bernanke Gambling Billions of Your Money

Wednesday, 30 July 2008 02:11 PM EDT

Most people seem to regard Federal Reserve Chairman Ben Bernanke as "The Academic." No surprise there, he taught economics at both Stanford and Princeton.

But, really, he should be called "The Gambler."

He crafts himself as one of the most fiscally conservative figures of our era, yet he has managed to take some seriously risky moves on Wall Street and does not plan to stop.

In just the span of several months, Bernanke has used $30 billion to rescue failing investment bank Bear Stearns; he extended unprecedented direct lending privileges to investment banks; and he gave a $300 billion credit facility to guarantee Freddie Mac and Fannie Mae.

So why is Bernanke gambling billions, and maybe trillions, of dollars of taxpayer money?

The answer is simple: his legacy.

Many economists, especially those who follow Milton Friedman (as Bernanke does), believe that the Great Depression, or the Great Contraction as they call it, could have been largely avoided — if only the Federal Reserve of the time had been more actively involved.

Milton Friedman has made the case that the economic collapse of 1929-33 was the product of the nation's monetary mechanism gone awry.

In his view, the economic downturn that followed was the result not of speculation so much but that the Federal Reserve System failed to respond to bank failures and ensuing bank panics, which drove a widespread contraction in money circulation.

According to Friedman, this spurred increased deflation and output decline in the economy and, ultimately, caused the Great Depression.

Now armed with the full faith and confidence of Wall Street and the United States government, Bernanke, the ultimate academic, is taking a gamble that Friedman's theory of the 1930s can be applied to the current U.S. economy.

That's what Bernanke is setting out to do: Save the United States from what he believes could be another Great Depression.

Imagine if one man could single-handedly save the United States from a depression.

How would history regard this person?

Just as Franklin Delano Roosevelt is regarded by many as the greatest United States president, so would the economic community regard Benjamin Shalom Bernanke as the greatest economist and Federal Reserve chairman who ever lived.

Bernanke thinks that Friedman was right. He believes that by wielding the mighty power of monetary policy on the U.S. economy, he can save consumer confidence and prevent a major run on U.S. banks.

If you doubt Bernanke would put the financial health of an entire nation — arguably also that of the free world — all on a 1930s-era theory, just look at his own words.

In a 2002 speech commemorating Milton Friedman's birthday, Bernanke delivered a keynote address at the University of Chicago, where he said:

"Regarding the Great Depression. [Friedman is] right, we did it. We're very sorry. But thanks to you, we won't do it again."

Bernanke is living the ultimate dream of any academic: He has the chance to finally put theory into practice.

Problem is, the America we live in today isn't the America of the 1930s.

Bernanke is not taking into consideration the banking system of today, which is far different than the one that existed then.

Today, banks are national and even international instead of local and regional. The FDIC, too, exists to protect consumer deposits into commercial banks, greatly reducing the risk of a serious run.

Neither the FDIC nor independent banking experts, or anyone for that matter are predicting a depression-style run. It won't even be as bad as the S&L crisis of the 1980s, they say, and we survived that.

The U.S. dollar has changed too, moving from the gold standard to a market float, which has caused inflation to become a bigger concern than it was in 1930, when a simple monetary policy solution would have been very effective.

But is Ben right? Only if you believe that a fall-off in housing assets could trigger a generalized bank collapse, setting off massive runs on most U.S. banks and a broad economic crash in the U.S. economy.

The banks have been taking writedowns since August of last year. It's very hard to imagine what they have left to reveal, and it must be remembered that a writedown is not a loss.

Some of those mortgages will, in fact, be just fine. We just don't know which ones, which is fueling the credit crisis.

We've seen several shocking asset bubbles in recent years (the savings-and-loans, dot-coms, telecom stocks) and we came through it each time. Money was lost by some, made by others, recessions were triggered and overcome. No enormous bank runs.

Consumer spending is down but steady. Some retailers will close, of course, but others will prosper. Consumer lending on credit cards and auto loans has some tangles ahead of it, but that doesn’t mean people and businesses will stop borrowing.

In fact, the credit crunch is mostly about banks being afraid to lend, not borrowers running away.

So what has changed? Well, for one, we have Ben Bernanke in charge, and Gambling Ben believes, it appears, that his role in history is clear: take a case study from the world of academia and apply it to real-world America.

If only it were 1929. He'd be close to right.

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Most people seem to regard Federal Reserve Chairman Ben Bernanke as "The Academic." No surprise there, he taught economics at both Stanford and Princeton.But, really, he should be called "The Gambler."He crafts himself as one of the most fiscally conservative figures of our...
Wednesday, 30 July 2008 02:11 PM
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