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Thursday, July 12, 2012

Bernanke Lectures

Interested in how central bankers think?  Here are the 4 lectures given by Federal Reserve Chairman Bernanke to GW students. Although they do take a bit of a time commitment, they are well worth watching IMHO.  The Chairman covers history, the crisis of 2008, the Fed's response, and the aftermath.

If you're like me, they don't provide a lot of confidence in the people flying the plane--if you get my drift.

Bernanke reminds me of a ghost buster who sees a ghost every time the bushes move.  He saw deflation in 2003 and, along with Greenspan, led the Federal Open Market Committee to push the fed funds rate to 1% in the face of a housing market that was already picking up. Why?  Because, as a student of the Great Depression, he arrived at the conclusion that the big mistake in the 1930s was the failure of the Fed to act aggressively in the face of an economic downturn.

He casually deals with criticisms of the Fed for lowering rates but cites weak data that 1% fed funds wasn't a serious cause of the housing bubble.  In this, he fails to mention evidence produced by John Taylor that suggested following the Taylor rule and keeping the rate at 3% and above would have dampened and possibly prevented the 2008 debacle.  The GW students, who on the whole asked some pretty good questions, failed to bring this up.

He also seems genuinely puzzled by the fact that the economy acted so differently to the housing bust compared to the 1987 stock market crash.  It is fact, supported by embarrassing quotes, that Fed officials, primarily Bernanke and Greenspan, were totally befuddled by the whole housing market downturn.  This extended to the Fed's confusing response of providing a liquidity response to what was (and still is!) a solvency problem.

Another puzzling piece to me is how Fed examiners didn't come up with a funny smell in doing their job of examining bank financials, because surely they came across their off-balance sheet holdings. Bernanke admits that the Fed was focused on controlling interest rates rather than ensuring a stable financial system (which is an important part of what Congress gave them a mandate to do!) during this period, but this simply isn't good enough IMHO.

In fairness, Bernanke, et al. deserve kudos for acting swiftly once they confronted the modern-day version of a panic when money market funds faced massive withdrawals.  I'm still not clear where they got the authority to guarantee everything they did, but they probably did prevent another Great Depression.

It is clear from watching the lectures that Bernanke is an excellent teacher.  I, for one, would like to see him go back to Princeton and resume his teaching career.

I'm sitting in the back of the plane until that happens--I hear that's the safest place.

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