Stephen Roach: The case against Bernanke
While most economists have come out in favor of Barack Obama’s decision to re-appoint Ben Bernanke as Chairman of the Federal Reserve Board, Stephen Roach has penned an Op-Ed in today’s Financial Times which highlights the case against Bernanke. It is must reading.
Roach has three main points.
- Before the Lehman bankruptcy, Bernanke was an adherent of the Greenspan-professed doctrine to “clean up after bubbles.” This is what others have called “The Greenspan Put,” otherwise known as an asymmetric monetary policy response – what I would term “lax during the bubble, and loose after it.” Clearly, this doctrine was responsible for much of the carnage.
- Bernanke was also a proponent of the “Asian Savings Glut” theory which puts much of the blame for global imbalances at Asia’s doorstep and exonerates over-consumption by American citizens for a credit crisis which began in America. I have called this the Blame Asia meme. While there may be excess savings, it is disingenuous to blame Asia for problems created in the United States.
- Bernanke, like Greenspan, is an ultra-free market Libertarian who believes markets always are better informed than regulators. This takes libertarian views to an extreme which I have dubbed “Deregulation as Crony Capitalism.” I see a more nuanced belief in free markets as more appropriate.
But Roach goes on to opine that Obama, with his early decision to re-appoint Bernanke, is signalling he believes the credit crisis has ended, a calculation that Roach believes may be hasty.
Notwithstanding these mistakes, Mr Obama may be premature in giving Mr Bernanke credit for the great cure. No one knows for certain as to whether the Fed’s strategy will ultimately be successful. The worst of the US recession appears to have been arrested for now – a fairly typical, but temporary, outgrowth of the time-honored inventory cycle. But the sustainability of any post-bubble recovery is always dubious. Just ask Japan 20 years after the bursting of its bubbles.
While financial markets are giddy with hopes of economic revival – in part inspired by Mr Bernanke’s cheerleading at the Fed’s annual Jackson Hole gathering – there is still good reason to believe that the US recovery will be anaemic and fragile. US consumers are in the early stages of a multi-year retrenchment as they cut debt and rebuild retirement saving. The unusual breadth and synchronicity of the global recession will restrain US export demand from becoming a new growth engine.
It would be the height of folly to reward Mr Bernanke for the recovery that never stuck. Yet Mr Bernanke’s apparent reward is, unfortunately, typical of the snap judgments that guide Washington decision-making. In this same vein, it is hard to forget Mr Greenspan’s mission-accomplished speech in 2004 that claimed “our strategy of addressing the bubble’s consequences rather than the bubble itself has been successful”. Eager to declare the crisis over, the Obama verdict may be equally premature.
Roach makes a lot of points I have done over the past few months. Here’s my translation of what he is saying with links to previous articles covering this ground.
- Recovery of some sort seems to be at hand.
- However, we may be seeing an inventory correction and nothing more.
- America could be headed toward a Japanese-like decade or more long period of stagnant growth aka the modern Depression.
- After all, consumers are not coming back to the party.
Much of the blame for this rests with Bernanke. As a result, Roach believes Bernanke should not be re-appointed:
Yes, he reacted strongly after the fact in taking actions to avoid the pitfalls highlighted by his own research. But he lacked the foresight and courage to resist the most reckless tendencies of the era of excess. The world needs central bankers who avoid problems, not those who specialise in post-crisis damage control. For that reason, alone, he should not be reappointed. Let the debate begin.
Obviously, I agree with Roach’s points as they echo many posts I have written on this site. Nevertheless, one has to ask, “what are the alternatives?” I am sure you know the other names up for consideration. And don’t tell me Volcker, Galbraith or Stiglitz. That was never going to happen.
Update: I wouldn’t characterize Ben Bernanke as “cut from the same market libertarian cloth,” as Roach does. I would suggest he has Libertarian leanings, but was probably the least inclined between himself, Paulson and Geithner to let Lehman fail.