With all the interest taken by the mainstream media in the machinations of Wall Street recently, I think it’s fair to say that financial illiteracy has increased rather than decreased. Now, instead of having a public which is quietly oblivious of the financial world around them, we have a public (and press) that still doesn’t understand the markets, but who now believe that they absolutely do. So instead of a mob who is ignorant and needs to be educated, we now have the same mob who first needs to have have the falsehoods they believe corrected before they can learn anything about finance at all. The net of all this is that the far right is looking dangerously similar to their far left peers. They are demanding that government do things that would not only ‘not help’ our economy but would make matters substantially worse.
No better example of that can be found than the far right’s view of Ben Bernanke. I’ve been very critical of Bernanke in the past because he had little private sector experience, and that lack of knowledge has hampered him in the past. He's been cloistered away at Princeton University in a protective academic cocoon for the bulk of his career. In his heart of hearts he’s an academic, and when he took the job as head of the fed under the Bush administration, that’s all the experience he brought to the table. But that isn’t to say that his academic experience was irrelevant or meaningless either.
There are many academics, like Paul Krugman for example, who spend their entire careers building a political philosophy around the idea of self congratulation. They hide behind a convenient mask of ‘free inquiry’ while they develop a vision of the world where everyone would be compelled by an all powerful government to obey their every word. That’s been my stated view of academia for some time, and I think it’s a pervasive problem, but I never thought that described Ben Bernanke.
On the contrary, Bernanke has proven himself a serious thinker with a deep and abiding knowledge of the history of the modern financial markets and the role that money supply has played in them. Unlike too many of his peers, he didn’t use the protection of tenure as an excuse to fall into complacency and mediocrity, but instead continued to publish important and meaningful work right up to his appointment at the Fed. He has proven himself a man who isn’t nearly as interested in self promotion as he is in understanding the truth of economics and finance. And in academia that makes him unfortunately rare.
But more than that, he has always made it clear that he understand the effect that inflation and deflation would have on the living standard of Americans. Prior to his appointment he had a reputation as an inflation hawk, meaning that he was less prone than his peers to accept modest inflation as a trade-off for higher economic growth. And while that view may have been fine with the people who appointed him, it puts him at odds with his new employers.
When Barak Obama was elected President, we got a chief executive that had little understanding of modern economics, and whose domestic policy was based on a ‘pie in the sky’ liberal ideology where short term intentions were considered much more important than long term results. His appointment of Tim Geithner as Treasury Secretary reflected that. Geithner has since enhanced his image as a financial hatchet man who will do or say whatever is necessary to get the President’s agenda adopted, and the best interests of the country be damned.
To be fair to Geithner, that’s his job and he's pursuing it with vigor. His is a political role and getting policy adopted is what it’s about. But that isn’t the job of the Federal Reserve chief, even if the Whitehouse would prefer it to be. The Federal Reserve was designed to be independent of government and free from political influence. But the Obama administration doesn’t believe that any aspect of American life should be free from government intrusion and the first place that they’ll need someone who is … “agreeable” to their agenda is at the Federal Reserve.
There are few informed people who think that Bernanke will be a good fit for the Obama view of a politicized Federal Reserve. And the view among financial pro's is that he'd be uncomfortable rubber stamping a monetary policy that comes from the Whitehouse. the generally held view among the well informed is that Bernanke sees his role more as an adviser to the Whitehouse and Congress than as a subordinate. And I think if you looked in his heart of hearts he’d tell you that it’s part of his job to defy the presidency if the policy it advocates is contrary to the interests of Americans. But it's unlikely in the extreme that Obama will share that view.
In the coming months the consequences of the government’s irresponsible spending will begin to arrive in the form of higher interest rates, and economic growth will begin to slow because of it. And when that unavoidable consequence occurs, the Whitehouse is going to try do what leftists ideologues have always done in circumstance like that… they will want to monetize the debt. They will pressure the Federal Reserve to print more money and to use it to buy the newly issued debt to keep rates down. This will seem like a perfect solution to the Obama team because it will solve the short term political issue, so they won't give the long term consequences even a second thought. And the last thing they will want in that situation is an intelligent and independent Federal Reserve chief standing in the way of their plans.
In the meantime, well intentioned but considerably less well informed people like Glenn Beck and the members at FreeRepublic, all seem to believe that Bernanke is complicit in the destruction of America as head of the Federal Reserve. They see the actions that he and Hank Paulson were squeezed into by Congress as being part of a grand design on their part rather than an unfortunate compromise driven by political naiveté. (As is the generally held view among financial professionals) What’s more, they see the Federal Reserve as a bad thing in principle so to them it's head must be some sort of cartoon villain. And they are also lobbying hard to get its books opened up for an audit by congress and to make the bank more responsive to the historically irresponsible legislative branch.
But by looking for political solutions to their problems; problems that should best be left to market forces to solve, these well intentioned people on the right are playing into the hands of their opponents on the left. They are handing them another means to obtain the power and authority to do exactly what the right has always feared most, the destruction of the dollar and with it the American living standard. The left is pursuing its separate plan to ‘empower’ the Fed to be a super-regulator. That will make the Fed an official part of the government’s regulatory framework, and the effect will be to politicize monetary policy in another way. So its particularly ironic that the short term goals of the right now play so well into the hands of leftists who are using a different method with similar goals.
With all that said though, none of this can happen until the Obama administration ditches Ben Bernanke. He’s too smart to preside over the kind of foolish and short sighted policies they will be proposing. And for that reason alone, the Obama administration will have to get rid of him. Of course, Ben almost certainly see’s what’s coming as well, and it’s an environment with lower growth and higher inflation regardless of what he does. They've already painted the Fed Chief into an ugly and dangerous corner where the best option will be the one that does the least long term damage. There isn’t going to be any ‘good choices’ going forward so it’s entirely possible that he already wants to leave. If that’s so, it would be a shame for America because there is little chance that the Obama administration will appoint someone to the job who would be better able to manage it than him.
I’ve criticized Ben for his role in the bank bailouts as being too reactive, and not anticipating the hazards and pressures from the banks. I’ve also criticized him for not appreciating how economically illiterate the congress was, and for (apparently) believing that he and Henry Paulson could ‘handle’ them. But I think he’s always made it clear that he understands the threat of a politicized monetary policy. And I think the economically illiterate portions of the right are making a huge mistake to be demanding his head. They may win the battle, but it will help them lose the war.
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