Why should we expect the Fed Chairman to solve a crisis he didn’t see coming?
“The story of the year was a weak economy that could have been much, much weaker. Thank the man who runs the Federal Reserve, our mild-mannered economic overlord.” Thus wrote Time magazine about Fed Chairman Ben Bernanke, winner of the magazine’s “Person of the Year” award for 2009. Virtually crediting Bernanke with halting the world's descent into an abyss, Time reverentially portrays him as a benevolent demigod, wisely presiding over our economic healing.
But when one carefully reads the featured interview, an impression forms that is sharply at odds with the one intended by Time's panegyric. The interview is, in fact, so full of red flags that one almost wants to run for the closest panic button. Perhaps the most revealing moment comes when Bernanke talks about whether he foresaw the 2008 crisis:
“We were certainly aware of the risks of financial crisis, but one as large and as dangerous as this one, I certainly did not anticipate. I wish I had, but I didn't.”
This is an astonishing admission from the Fed Chairman. The man who is now supposed to fix our problems did not see them coming in the first place. One may perhaps think that the problems were so byzantine that they were undetectable until they at last erupted in the crisis. But this is not so. There were those who saw the problems clearly. A few predicted the crisis with uncanny accuracy.
One of them was Peter Schiff, a financial commentator and president of Euro Pacific Capital. From 2005 onward, Schiff warned about the upcoming meltdown both on television and in writing. Early in 2007 Schiff published a book called Crash Proof: How to Profit From the Coming Economic Collapse in which he told what was going to happen and advised how to prepare.
His predictions proved prescient and those who followed his advice were able not only to preserve their wealth but also to increase it. It is paradoxical that as Schiff was sounding the alarm, mainstream pundits – those of the Greenspan/Bernanke worldview – were laughing in his face. (You can see an eye-opening compilation of Schiff's pre-crisis appearances on major television networks and the sneers he received by clicking here and here.)
Peter Schiff was not the only person who saw the crisis coming. Texas congressman Ron Paul saw it also. As early as September, 2003 he warned in the banking committee of the US Congress about the danger of a real-state bust:
“If we continue to inflate this bubble this way the housing crisis is going to cause an explosion and there is going to be damage worldwide.”
Almost no one on the committee – or in America at large for that matter – listened to Ron Paul's warnings. Instead Paul was mocked and accused of insensitivity toward the poor. Needless to say, his foresight was vindicated in spectacular fashion by subsequent events.
Of course, Peter Schiff and Ron Paul have no crystal ball that enables them to foretell future events with uncanny accuracy. Their grasp of financial and economic situation is rooted in the Austrian school of economics. An outgrowth of classical liberalism, its main proponents are Ludwig von Mises, Nobel Prize winner Friedrich von Hayek and Murray N. Rothbard. One of the main focus areas of this school is the business cycle – the boom-and-bust recurrence – which defines the trajectory of western-style economies.
The Austrian school sees the central bank as the driver of the business cycle. This it causes by holding interest rates artificially low, which sends misleading signals through the economy. Fueled by cheap credit, more projects are begun than existing economic resources can support. These projects are termed malinvestments. Once inflation becomes a concern and the central bank – the Fed – is forced to raise interest rates, those projects must be abandoned. It is this that brings on the bust, more commonly referred to as “recession,” which is something we are living through right now. During this painful period of readjustment, labor and resources that were tied up in malinvestments must be relocated to more sustainable uses. The bust – unpleasant as it invariably is – is in reality a necessary and much-needed corrective. Because of this, it should be left to run its course. Any attempt on the part of government to forestall it will only make the inevitable day of reckoning all the more painful.
Yet this is precisely what our government, under Bernanke’s advisement, has been attempting to do. It has tried to keep up the inflated property prices; it has bailed out malinvestments; and, perhaps most dangerously, it has kept interest rates at near zero percent.
Ben Bernanke's Fed has had a hand in all three policies. It has been buying toxic mortgage-backed securities, it has been providing cash for the bailouts, and it has been holding the federal funds rate at the rock bottom. And even though these misguided policies have softened the bust by partially re-inflating the bubble, they will produce disaster down the road. They have only postponed the inevitable and the next bust will be more violent than it would have been without all this government intervention. Equally alarmingly, the Fed's loose monetary policy has put great downward pressure on the currency. The dollar has lost nearly twenty percent of its value since February 2006, the month when Ben Bernanke took the reins of the Federal Reserve. The policies he has pursued have greatly contributed to this decline.
But such is the way of government that those who cause most damage also receive most fawning and admiration. FDR, who kept America in the grip of the worst and longest recession in the country's history, is widely worshiped today. Jimmy Carter, whose policies likewise caused much economic hardship, is feted as an elder statesman and was even given a Nobel Prize. Barack Obama – America's most radical president who is taking this country down the road to socialism even while spending it into oblivion – received a Nobel Prize barely nine months into his first term. How fitting that each of the three men has also been named Time's Person of the Year.