Outgoing Fed Chair Ben Bernanke took a moment last Friday to bid farewell. With his final speech as Fed Chair, he endeavored to clarify exactly what he’s been up to over the last eight years. Many topics were touched upon; strangely, trashing the currency wasn’t one of them.
More insightful to Bernanke’s time as Fed Chair, however, is not his outgoing speech. Rather, it’s a speech he gave several years prior, as a Fed Governor, where he laid down his rules for combating a deflationary depression. Hence, we’ll pause a moment to review the Bernanke doctrine, as excerpted from his November 21, 2002 speech: “Deflation: Making Sure ‘It’ Doesn’t Happen Here.”
“The U.S. Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost,” explained Bernanke. “By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. Government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the price in dollars of those goods and services.”
Later in this same speech, Bernanke made reference to a “helicopter drop”, alluding to a central banker hovering in a helicopter – dropping suitcases full of money to individuals. Naturally, this little oration earned him the name ‘Helicopter Ben’…a name he did his damnedest to live up to.
When it comes down to it there are generally two types of central bankers: There’s the stooge and there’s the true believer. What follows is a brief characterization of the two…
The Stooge and the True Believer
Bernanke’s predecessor Alan Greenspan was a stooge through and through. Having written one of the better defenses of the gold standard 20-years prior to becoming Fed Chair, Greenspan knew fiat money was “simply a scheme for the confiscation of wealth.” Nonetheless, he delighted in the vanity of money creation and having his wrinkly mug on the cover of Time magazine.
Greenspan was under no academic delusions. He understood using monetary policy to guide the economy was like trying to land the Lunar Excursion Module using a magnetic compass. His gift was playing Congress like a fiddle with incomprehensible utterances of Greenspeak.
Opposite of Greenspan, Bernanke actually believed he could use monetary policy to tinker down the unemployment rate, tinker up the consumption rate, and usher in the more abundant life. His days contemplating apparent aggregate demand insufficiencies and perceived supply gluts at Princeton University warped his brain. All his time staring at graphs and charts while pondering possible government policies to make them show what he wanted had the ill effect of transforming him into a zealot.
During Bernanke’s years as Fed head, not a metric deviated from his threshold of acceptability without an abrupt monetary response. Low consumption, high unemployment, a sluggish housing market…you name it. Bernanke was there to intervene in the market; to bend the world more to his liking.
Of course, Bernanke’s policy response was always the same. Cheapen credit and print more money. Even so, he was much more creative and imaginative in how he went about it than any Fed Chair before him.
So Long Ben, and Thanks for All the Memories
Perhaps Bernanke never conceived he’d have the occasion to test his theories. But when the mortgage market broke the camel’s back of Greenspan’s easy money housing creation in 2008, he knew just what to do. He took monetary policy to places no Fed Chair had gone before.
First he lowered the federal funds rate to practically zero – where it still remains. But when that didn’t quickly remedy the situation he went completely mad. Bernanke implemented a series of money creation tactics that had previously been reserved for financing banana republics.
Quantitative easing, QE2, operation twist, and QE3 were executed to artificially suppress treasury and mortgage rates and place a false bottom under the stock and housing markets. This ballooned the Fed’s balance sheet to over $4 trillion. In other words, since late 2008, Bernanke quadrupled the Fed’s balance sheet by adding over $3 trillion of freshly created money.
Through it all, Bernanke went about it like a brain surgeon goes about separating conjoined twins. What we mean is he acted with calm hands, intestinal fortitude, and plenty of guesswork. Bernanke, no doubt, is a total madman.
Yet he conducted his business with the composure of a Buddhist monk on fire. Having the belief he was saving the economy, he helped the world ruin itself with peace, serenity, and a clear conscience. There could be no higher calling for a central banker of the true believer persuasion.
From the cheap seats we’ve gawped and gawked…Bernanke never let us down. Day in and day out he always delivered the greatest show on earth…
So long Ben, and thanks for all the memories.
for Economic Prism