Ben Bernanke's career has not included a moment outside of academia and government. Bernanke taught at the Stanford Graduate School of Business from 1979 until 1985, was a visiting professor at New York University and went on to become a tenured professor at Princeton University in the Department of Economics. He chaired that department from 1996 until September 2002, when he went on public service leave. He resigned his position at Princeton July 1, 2005.
Bernanke served as a member of the Board of Governors of the Federal Reserve System from 2002 to 2005.
To understand this man I first had to understand Keynes.
John Maynard Keynes was an academic out of Cambridge. He published his General Theory in 1936, although informal versions circulated in academia prior to that. In the 1920's he was a neo-classical economist, utilizing Marshall's neo-classical Quantity Theory of Money to explain economic activity, unemployment, price levels, and interest rates. He changed his orientation due to British economic stagnation and high unemployment from 1918 through the 1920's, which was unexplained by neo-classical theory. Keynes never spent a moment outside of academia and government as well.
To understand why the United States and Europe in general seized upon Keynsian theory one must understand the desperation that drove these countries and many others far to the left. At almost any other time in history Keynes would have been dismissed as a loon. The tenets of Keynes' theory follow:
1) Keynes advocated interest rates as close to zero as possible. His rationale was that interest hits the poor disproportionately and discourages marginal investment projects. Once set close to zero they should never be raised.
2) Keynes felt that an economy with no savings would function more efficiently with government directing investment rather than the rich investing their savings. Thus zero interest rates fits right in to discourage saving and thus encourage consumption.
3) Keynes advocated debt creation by government to the extent that full employment does not exist. His definition of full employment was literally that anyone wanting a job had one.
4) Spending by government is investment and there is little or no distinction given to the target of the spending.
5) Taxation should be progressive just out of fairness. Once the economy was freed from the rich directing investment there was little need for the rich to accumulate savings, which were mal-directed especially during economic slumps (they just sat there due to fear).
6) Keynes had no fear of inflation because he believed that government boards should exist to control the pricing of commodities and import restrictions on nonessential products.
7) According to Keynes, state planning was not to be confused with Fascism or Communism. There was still plenty of room for the private sector to operate. "I believe the right solution will involve intellectual and scientific elements which must be above the heads of the vast mass of more or less illiterate voters." That was a direct quote.
Bernanke is the perfect Keynsian. He espouses all of the principles by applying them to our hides to the extent that his mandate allows. Zero interest rates, unlimited credit creation, espousing public purchase of floundering banks and other companies. What more evidence is required to acknowledge his profound allegiance to a fellow academic? We mere mortals cannot hope to understand or administer the brilliant theories of the elite.
In one of his first speeches as a Governor (2002), entitled "Deflation: Making Sure It Doesn't Happen Here," he outlined what has been referred to as the Bernanke Doctrine. Bernanke emphasized that Congress gave the Fed responsibility for preserving price stability (among other objectives), which implies avoiding deflation as well as inflation. He states that deflation is always reversible under a fiat money system. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve monetary policy goals). Bernanke asserted that the Fed "has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief" .
In order to combat deflation, Bernanke provided a prescription for the Federal Reserve to prevent it. He identifies seven specific measures that the Fed can use to prevent deflation.
1) Increase the money supply (M1 and M2).
The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation."
2) Ensure liquidity makes its way into the financial system through a variety of measures.
"The U.S. government is not going to print money and distribute it willy-nilly ..."although there are policies that approximate this behaviour."
3) Lower interest rates - all the way down to 0 per cent.
Bernanke observed that people have traditionally thought that, when the funds rate hits zero, the Federal Reserve will have run out of ammunition. However, by imposing yields paid by long-term Treasury Bonds, the central bank should always be able to generate inflation, even when the short-term nominal interest rate is zero ...[this] more direct method, which I personally prefer, would be for the Fed to announce ceilings for yields on all longer-maturity Treasury debt."
He noted that Fed had successfully engaged in "bond-price pegging" following the Second World War.
4) Control the yield on corporate bonds and other privately issued securities. Although the Federal Reserve can't legally buy these securities (thereby determining the yields); it can, however, simulate the necessary authority by lending dollars to banks at a fixed term of 0 per cent, taking back from the banks corporate bonds as collateral.
5) Depreciate the U.S. dollar. Referring to U.S Monetary Policy in the 1930s under Franklin Roosevelt, he states that:
"This devaluation and the rapid increase in money supply ... ended the U.S. deflation remarkably quickly."
6) Execute a de facto depreciation by buying foreign currencies on a massive scale.
"The Fed has the authority to buy foreign government debt ... [t]his class of assets offers huge scope for Fed operations because the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt."
7) Buy industries throughout the U.S. economy with "newly created money" In essence, the Federal Reserve acquires equity stakes in banks and financial institutions. In this "private-asset option," the Treasury could issue trillions in debt and the Fed would acquire it, still using newly created money.
The full text of his speech is
here.
Bernanke, the academic, has embraced the concepts of another academic, Keynes, and has used this as the philosophical and strategic basis for his actions. The similarities between the theories of the two men is striking. Both had a goal of 0 savings, driven out into spending by protracted, ultra-low interest rates. Thanks. The last Fed chairman bereft of private sector experience was Arthur Burns. What a disaster that was.
What is outside of Bernanke's scope Congress fulfills. I posted previously about the ego of legislators and how Keynesian economists dove-tailed with them. Congressmen and senators get scored in elections based on how well they satisfied their constituents' desires. In addition, bringing home the bacon aids re-election even if nobody asked for that particular pork. Finally, a senator waking up is like a CEO, preening in the mirror and reaffirming god-like status. In the old days, to be reminded by classical and neo-classical economists in committee meetings that the public accounts must be balanced is castigation and therefore insulting to their image. No more, the pols are enabled by the economists.
Now, in America, the factories have fled, the tech miracle faded, and the service economy is evaporating. What was laid bare was the fact that there was a shortage of actual physical product that America could export. Without building "things" then permanent, good-paying jobs disappeared, replaced with pseudo-jobs and government jobs. Now there is no place to hide. QE3 is a political impossibility. Stimulus is a political impossibility. The options were squandered by the latest ratchet down the rabbit hole. Each crisis comes quicker than the last and tacks another "0" on the price tag. Finally at 100% debt/GDP the Tea Party was voted in and Congressional oversight of the Fed is in the hands of it's mortal enemies. Unlike the experience with Arthur Burns, the tolerance for unlimited debt creation is ending.
Bernanke is rapidly being discredited around the world and Americans will be surprised how quickly he will be discredited here. In the next crisis the Fed will be prevented from significantly expanding it's balance sheet by Congress.
It is vital for Americans to understand the origins of the Keynsian doctrine that has destroyed America from the inside over a period of 75 years. Attacking the symptoms is insufficient to the restoration of Constitutional proscriptions over government activity.
