Hedge fund manager Scott Frew is a friend and occasional fishing partner. He had a few words to say about this morning’s discussion re: Volcker and Bernanke:
I wanted to flesh out some of what Barry wrote earlier about former and current Fed Chairs Volcker and Bernanke. We must begin with Bernake’s now infamous Deflation speech. It is certainly “The Speech.” And I think in many ways it’s a terrifying document.
I am, by the way, in total agreement that Greenspan’s the guy who’s responsible for all of this; the particularly insidious quality of bubbles is that once you’re in one, the future is more or less pre-ordained.
An ironic corollary of that thought is that it pretty much invalidates the entire, mainstream (most certainly including Bernanke and Greeenspan), Milton Friedman-inspired critique/view of the Great Depression as having resulted from bad monetary policy on the part of the Fed as the bubble burst. They needed, according to that critique, to be much looser than they were, and all the problems would have been avoided.
So, in a sense, Bernanke’s an acolyte of that same church (recall him saying to Friedman, at some dinner or something honoring him, Never again; i.e., as a result of the lessons learned, taught by Friedman, the central bank would never repeat those Depression errors,), can’t fall back himself on a “It’s Greenspan’s fault” defense, because that’s antithetical to their whole view of history.
I see The Speech itself as a terrifying document, although it’s also an
absolute blueprint for what’s going on today — you’ve got to give Ben
credit for foresight; he’s running down the checklist he provided there,
item by item, line by line. Too bad none of it’s working, at least to date, but
instead is exacerbating the problems.
The other thing to do is to look at
the steps along the way, including that represented by this speech,
incidentally, by which Ben provided intellectual cover and backdrop for
The latter task is pretty simple. Let’s first note that Bernanke
moved from the Fed, to become Chairman of the Bush’s Council of
Economic Advisors, and then back to succeed Greenspan as Fed Chairman.
There’s been lots of criticism of the Bush administration, on lots of
fronts, for its politicization of many different policy arms. Certainly
Greenspan has been criticized, and not just recently, for being an
overly political creature, shifting his public statements about fiscal
policy and taxation to fit the views of his changing political masters.
And there’s been recent criticism that the Fed has come to view itself
more as an adjunct member of the Bush cabinet, than in its traditional
and prescribed role as an independent policy-making body. Bernanke’s
career path exemplifies that sort of politicization, which ought to
raise alarms on all sorts of level. Getting to more fundamental issues,
he was at all moments a willing and eager accomplice to Greenspan’s
rate-cutting efforts and asymmetrical policy responses, all of which
engendered moral hazard in the DNA of the markets, and told speculators
at every level not to worry, that the Fed had their collective backs.
The “global savings glut” answer to Greenspan’s “conundrum” as to the
explanation for low long term interest rates is a perfect example of
Bernanke playing the geeky intellectual to Greenspan’s smoove political
animal, providing an ingenious, and plausible, explanation for a
phenomenon that had equally plausible, and far simpler, yet less
convenient, explanations. Occam’s razor doesn’t always rule.
Back to the speech, early on Bernanke signals the asymmetrical
policy response which characterized the Greenspan Fed from early on,
and which has continued under Bernanke. The Congress has given the Fed
the responsibility of preserving price stability (among other
objectives), which most definitely implies avoiding deflation as well
as inflation. I am confident that the Fed would take whatever means
necessary to prevent significant deflation in the United States. Do you
have any recollection of Ben suggesting, at any point, as the prices of
a wide variety of goods and services, that middle class Americans
purchase on a day to day basis, has skyrocketed, invoking Malcolm X in
his willingness to use any means necessary to keep inflation under
control? I sure don’t.
Then in the speech he starts talking about how to prevent deflation.
The famous “technology, called a printing press” statement is a
not-veiled at all threat to simply drive down the value of the dollar.
Certainly one way to get people spending is to let them know in no
uncertain terms that tomorrow their savings will be worth half of what
they’re worth today. Ask any citizen of Harrar — it works for them. 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 prices in dollars of those goods and services.
Bernanke’s been incredibly successful in this endeavor — just look at
the price of oil, gold, wheat, milk, rice — the list goes on and on.
The speech runs through all of the other gambits that Bernanke’s
been attempting over the last six or so months. At the end, he
discusses the case of Japan, and why despite all these theoretical
weapons in the Fed’s toolbox, Japan was unable to stave off
deflationary forces. He starts that section of the speech by noting
significant differences between Japan and the United States — recall
that this was November, 2002:
"As you know, Japan’s economy faces some significant barriers to
growth besides deflation, including massive financial problems in the
banking and corporate sectors and a large overhang of government debt.
Plausibly, private-sector financial problems have muted the effects of
the monetary policies that have been tried in Japan, even as the heavy
overhang of government debt has made Japanese policymakers more
reluctant to use aggressive fiscal policies (for evidence see, for
example, Posen, 1998). Fortunately, the U.S. economy does not share
these problems, at least not to anything like the same degree,
suggesting that anti-deflationary monetary and fiscal policies would be
more potent here than they have been in Japan."
Uh, Dr. Bernanke, I’m not sure you had that quite right, or that the
conditions than applicable pertain today. In fact, it appears that our
situation today is worse than Japan’s in those respects. The one factor
in our favor is that exorbitant privilege of having the reserve
currency, of being able to pay off our debt in a currency which only we
can print. As Jim Grant said in a recent essay, there’s only one nation
that has that ability, and it’s national pastime is baseball. But the
advantage of owning the reserve currency is a blessing easily abused.
In terms of what our national balance sheet looks like, it seems easy
to describe it as more curse than blessing. Bernanke has often seemed
blind to the fact that our monetary policy has far-reaching
implications, that riots over inflation in the Gulf Cooperative Countries,
over food in Egypt and the Philippines, might be connected to our
interest rates and the value of the dollar.
In the end though, I keep coming back to the thought that Bernanke
apparently believes that deflation, a decline in the general level of
prices—those of milk, of gas at the pump, of home heating oil, and of
food and clothes— is such a threat to our society, that printing
dollars until the cows come home, in a conscious effort to destroy the
dollar’s purchasing power, is a rational response. Interesting stance
for the head of the Federal Reserve to take, I must say.
Good stuff. Thanks, Scott!
Volcker: "Bernanke a One Termer"
Deflation: Making Sure "It" Doesn’t Happen Here
Governor Ben S. Bernanke
November 21, 2002