Ben Bernanke, Improvisor

A must read piece is in the upcoming June 2008 Bloomberg Markets Magazine titled: The Improviser

"Ben Bernanke, the consensus-building academic who toiled in Alan
Greenspan’s shadow, is emerging as the most powerful–and
inventive–Federal Reserve chairman in the 95-year history of the
central bank. Paul Volcker says he’s overreaching . . .

From Bernanke’s standpoint, there are two major lessons to be learned from the Fed’s reaction to the market crash of 1929 that are relevant today. The first is that the Fed should lower rates, not raise them, in the face of an economic contraction. The second is that the Fed must pay careful attention to the health of financial institutions, as lending plays a big role in economic growth.

In July 1928, when financial markets were still booming, the Fed raised its benchmark interest rates to 5 percent, the highest since 1921, effectively cutting the money supply, in order to reduce what it saw as excess speculation on Wall Street. It did so even though there were no signs of inflation, Bernanke said at the conference honoring Friedman. In October 1931, after the market crashed and GDP had begun to nosedive, the Fed raised rates again to prevent the dollar from falling in international markets. That made it harder for companies and individuals to borrow even as the economy was contracting 30 percent and deflation was setting in. A series of bank failures further reduced credit throughout the economy."

Go read the full piece now . . .


The Improviser
Steve Matthews
Bloomberg Markets Magazine June 2008

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What's been said:

Discussions found on the web:
  1. ECONOMISTA NON GRATA commented on May 12

    It seems like so much academic hyperbole about Bernake… Or is this some kind of public relations stunt…. “gimmick”?

    As a Fed Chairman, it might have occurred to me that assuming risk of such magnitude would violate my fiduciary obligations. I guess that in todays world, anything goes.

    As I stated in one of my comments yesterday, is mission accomplished….? Is it really….?

    I don’t think so………….

    Best regards,


  2. ac commented on May 12

    Bernanke hasn’t done anything. He has just taped up the financial situation tempwise with government borrowing.

    If the debt markets implode that won’t look to good.

    He also has to deal with the commercial and credit card blowups that are just starting. They will probably be the Augest 2008 version of Augest 2007. Though Bernanke may not care as long as it doesn’t cause systematic risk to the banks.

    FWIW, I sent a email to the author of that article explaining his errors. The FED cut rates down to 150bps by December 1930 BEFORE they raised rates. Get your facts straight idiot.

  3. bsneath commented on May 12

    I don’t think those who oppose Bernanke’s interest rate cuts understand the gravity of the economic downturn that we are facing. Housing and commercial construction will likely contract to unprecedented levels due to the surplus of housing stock and the permanent decline in domestic consumption. Demographics will have a greater impact going forward as an aging population consumes less. Job losses will likely accelerate after (possibly even during) the rebates. MEW & HELOCs will no longer artificially prop up economic expansion.

    Our only salvation will be in the development of the export sector and in a return to producing goods and services that we have become accustomed to importing. This will mean the dollar will need to stay depressed. Unfortunately, I can also envision a vicious cycle, in a booming global economy, where higher exports driven by every drop in the dollar is offset by higher import costs, in particular oil.

    I envision a future where the economic strength of the United States declines rapidly relative to the rest of the world.

    That being said, the alternative would be even worse. Higher interest rates would inflict (even more) permanent damage on the financial system, discourage investment even further than it already is, exacerbate and extend the housing crisis and result in substantially higher job losses, at which time interest rates would need to be lowered, the dollar would fall and our now much weaker economy would still need to convert to more exports and more domestic substitution in order to pay off our global debts.

    There is no good path to take. The best that can be done is to find a path that will do the least amount of harm as we unwind the excesses of the past.

  4. Winston Munn commented on May 12

    Did anyone else get flashbacks of “Leave it to Beaver” reruns?

  5. Bob A commented on May 12

    Improvisor or improviseur?

    Whether the moves saved us from collapse or not, there’s still no explanation for how billions in zero down subprime loans on questionably inflated values were allowed to be made over several years without an alarm being raised.

    So let’s say we agree he is so smart he knew the right thing to do would be to lower rates when the bubble burst.

    How come his vast understanding didn’t tell him there was a bubble being inflated that inevitably would burst?

    Inquiring minds want to know.

  6. Alfred commented on May 12

    Commentators are already sharpening their pencils as they get ready for a celebration of the world’s most laudable savior. Though in my book this will be just another twist of reality that Wall St. is capable of pulling off.

    The great Bernanke in his wise academic research criticizes Fed policy during the Great Depression and apologizes for the actions of Mellon and Hoover. What Bernanke and his followers forget to mention is that this purgatory actions gave way to an unprecedented “superboom” in capital markets. Nobody suggests that economic depression is a good thing but most would agree that business cycles are necessary to avoid climactic economic events. The dilution of moral hazards through bail-out after bail-out is indeed something to pay close attention to.

    Market fundamentalists, as introduced during the Reagen years, should not be too reassured that the Fed will always carry the torch. Indeed even in the current crisis we see signs of a powerless Fed. 55% of US banks reported tighter lending standards in April, that is up from 30% in January. The cost of loans also went up, with 70% of banks raising the spread of their loan rates.

  7. ac commented on May 12

    No doubt. All that consumer credit and all it did was keep retail sales steady minus energy. Ugly. I know for a fact credit card companies are tightening purse strings but like many things, there is a lag before it hits the open consumer. Cutting of the ability to spend will either force the government to run a 2 trillion dollar deficit and watch debt markets implode or cut spending majorly while they give super stimulus checks to the citizenry. No way out: The story of the US economy.

    Defaults will skyrocket,

  8. Johnnyvee commented on May 12

    This article assumes that the depression was solely caused by the stock market crash. At the time we were an export nation and England, following WWI, was our major importer. It, however, ran huge account defecits and when it ran out of money and went into its own recession, the USA went into a nose dive. When England stopped, or greatly reduced, its import of USA products our export eceonmy stalled. This relationship sounds familiar to China and USA. It was the stock market that continued to climb while the real economy was deteriorating until it collapsed.

  9. John Wellman commented on May 13

    Help here, fluff there. Propping up markets, making us feel better. Economic cancer (all of the above) needs to be fought with the most aggressive chemo and radiotherapy. The economy needs to implode to flush out the bad ideas, bad decisions and poor business models. In this age of feeling good, we would rather go to a new age guru (or seventh day adventist) to hope out way to a better economy rather than do what is necessary to fix ourselves. Bring on the pain, so later we have the efficiency to appreciate actual economic success.

  10. Patrick commented on May 13

    Why does this have anything to do with Bernanke the man? He was chosen cause he fit the role that was needed at the time.

    He’s the chief moneylender of the most powerful empire that’s ever existed on the face of the earth in the entire history of mankind. He’s got room to play but he also has bosses to deal with just like everyone.

    Besides, if inflation gets that out of control they’ll just find a new Volcker.

    Don’t make the mistake of believing that US money supply is all there is–worse comes to worse we’ll use the Fed $$$ to buy up all the bridge companies in the world, blow up all the bridges, then make a tidy profit building new ones. To think that monetary policy is separate from economics, politics, geostrategy, wars, gold standard, competitors, etc., etc., is just stupid.

    The guy is doing fine. It’s not his fault he got stuck with a shitty job at a shitty time. ;p

    (that being said I am NOT buying dollars anytime soon. that’ll come in a couple years when people realize there is no alternative and that, yes, the US is still preeminate, and that, yes, all those people with dollars will have to do SOMETHING with their cash. if it took the romans 300 years to decline I think we can trust the US to last at least 150)

  11. KJ Foehr commented on May 13

    I think Timothy Geitner is the man behind the curtain.

  12. Mr. Beach commented on May 13

    IMHO, Hank Paulson is running the show. Bernanke visibly appears weak and without conviction during his Congressional testimony — and I don’t mean the standard academic on-the-other hand stuff — I mean that Bernanke appears to hesitate, pause and speak weakly.

    By contrast, Paulson is richer, has deep Wall Street experience, is physically bigger and as a CEO, has probably mastered the art of making people see things his way.

    I can imagine any number of Paulson to Bernanke conversations that where Paulson tells Bernanke horror stories designed to sway his opinion.

    This Administration has mastered the art of hiring intelligent, but easily manipulated frontment. Think Colin Powell.

    When the history of this era is written, I believe Bernanke will be shown to naive, easily manipulated and as a consequence, grossly negligent.

  13. Scott Lanman commented on May 13

    Bernanke Lunched With Dimon, Rubin Before Bear Stearns Rescue

    Federal Reserve Chairman Ben S. Bernanke lunched on March 11 with a Who’s Who of Wall Street leaders, including JPMorgan Chase & Co.’s Jamie Dimon, three days before the central bank rescued Bear Stearns Cos. from bankruptcy.

    Bernanke also briefed Republican presidential candidate John McCain on the Bear Stearns episode over the phone, according to Bernanke’s schedule for March and Douglas Holtz- Eakin, McCain’s economic adviser. Bloomberg News obtained the schedule in response to a request under the Freedom of Information Act.

    The luncheon at the New York Fed gave Bernanke a chance to hear from chiefs of some of the biggest U.S. financial companies and hedge funds in the middle of his most tumultuous month as central bank chief. The meeting came hours after he announced plans to lend $200 billion of Treasuries in exchange for debt including mortgage-backed securities.

    Bernanke and New York Fed President Timothy Geithner, seeking to avoid a financial-market meltdown, orchestrated a $13 billion emergency loan to Bear Stearns on March 14. Two days later, they eased the company’s sale to JPMorgan after the Fed agreed to take on $30 billion of mortgage-backed securities and other assets from Bear Stearns.

    The chairman’s March 11 lunch with financial-industry executives was held at the New York Fed, with Geithner also attending. Bernanke and Geithner told Congress last month that they were informed of Bear Stearns’s troubles on March 13.

    Other Guests

    Besides JPMorgan Chief Executive Officer Dimon, guests included Goldman Sachs Group Inc. CEO Lloyd Blankfein, Lehman Brothers Holdings Inc. CEO Richard Fuld, Morgan Stanley President James Gorman, Citigroup Inc.’s Robert Rubin, Blackstone Group CEO Stephen Schwarzman, Merrill Lynch & Co. CEO John Thain and Citadel Investment Group LLC CEO Kenneth Griffin.

    The daybook, as released and redacted by the Fed, otherwise contains few new details about the events surrounding deliberations to rescue Bear Stearns and create two emergency- lending programs for Wall Street bond dealers.

    Bernanke traveled to New York on March 7 for three meetings, including one over lunch. The Fed blacked out the identities of attendees at all three sessions.

    McCain, an Arizona senator, called Bernanke on March 24 to get a briefing on Bear Stearns, Holtz-Eakin said in an interview. They spoke at noon for about 15 minutes, according to the daybook. Bernanke, who was appointed by Republican President George W. Bush in 2006, called Holtz-Eakin the next day to find out if McCain got what he wanted, Holtz-Eakin said.

  14. Marcus Aurelius commented on May 13

    “The daybook, as released and redacted by the Fed, otherwise contains few new details about the events surrounding deliberations to rescue Bear Stearns…

    …The Fed blacked out the identities of attendees at all three sessions.”


    Thank god we’ve got the waterboard. We’re going to need it as we begin handing down indictments. Bernanke good, or bad? Who cares. If he’s not with us, he’s with the econo-fascists.

    Just sayin’.

  15. michael schumacher commented on May 13

    That BB is held in high regard by some is just laughable…..he is only following the lead of Paulson. He is not his own man, never was, never will be.

    But he is the person that the uninformed look to “fix” things. When the committee says over and over “you’re the expert” they are just playing into the game. IMO his appointment as Fed Chair was the biggest snow job since the Iraq war. “look he wrote a book about inflation and studied the depression” Obviously he didn’t do a very good job at either….witness the policy of print and destroy.


  16. Wilson commented on May 13

    Why was he talking to McCain?

  17. Wilson commented on May 13

    Why was he talking to McCain?

  18. michael schumacher commented on May 13

    you must mean Johnny McBush…..

    that’s a really relevant issue..but they seem to have already installed him at this point. Elections be damned..


  19. DonKei commented on May 13

    “He was always able to keep his cool dealing with crises here at Princeton, even when others, like me, were going crazy.”

    One can only imagine how well-tempered his strength to deal with crises must now be. College campuses are generally excellent crucibles for forging level-headedness in crises, the resolution of which have ramifications the world over.

    I’m sure the East Asian food rioters would agree, as Ben’s helicopter showered them w/ money enough to cause an illusionary, inflation-driven demand leading to hoarding and border guards shooting on sight anyone attempting to export rice.

    There are sometimes real consequences for eggheaded stupidity.

    Show some balls Ben and raise rates before the dollar destroys the world.

  20. me commented on May 13

    “Paul Volcker says he’s overreaching . . .”

    This guy reminds me of Jack Welch, Alan Greenspan and Hank Greenberg. Bank benchers throwing firebombs. The only difference is he didn’t cause the current problems.

  21. D. commented on May 13

    Wow! The whole world is putting the weight of the world on one man’s shoulder. He’s been set up that’s for sure.

    At the end of the day, people have too much debt yet our economic system can not withstand deleveraging.

    There aren’t that many solutions. That debt needs to be deflated, thus the need for inflation.

    Inflation in assets will always flow into goods and services. The gains will get spent. That’s what we will be witnessing for a while.

    Either assets deflate or goods and services inflate. The reality will probably be somewhere in the middle.

  22. Rey commented on May 13

    “A bankruptcy filing would have forced Bear’s secured creditors and counterparties to liquidate the underlying collateral,” Bernanke said in his speech. “Given the illiquidity of markets, those creditors and counterparties might have sustained losses.”

    From Bloomberg article

  23. daniel commented on May 13


    Seems to me that the possible flaw in Bernanke’s reasoning about both the Depression and about the current situation is his take on inflation in the respective preceding boom years. Bernanke suggests that the Fed should not have raised rates in ’28 because of a lack of inflation (and so perhaps implies that the Fed reaction to the housing bubble was appropriate). Yet it could be that inflation was grossly underestimated in the 20s and 00s, and that quicker action could have mitigated the fall.

    And it could be now that a severe recession of a few years, due to the financial decelarator effect, is better than the ramifications of efforts to maintain prices. His testimony pretends that there are no negative consequences of attempting to keep a bubble aloft. However, the 2003 efforts to do the same via rates hasn’t ended so well.

    I wonder what Bernanke would have done had he been in Volcker’s shoes or in Korea during the Asian crisis…

    Stieglitz suggests, as far as I understand, that rather than try to keep prices high and keep the counter-party payment system intact, government should focus on unemployment and infrustructure programs. In other words–don’t try to control prices, but deal with the aftermath.

    Any opinions on these issues?

    I think this is my first comment ever–but I’m a long time reader of your most excellent blog.

  24. molten_tofu commented on May 13

    The Fed raising rates certainly seems to be a bad move when we talk about it out of context; but in context I think the Fed rate increase in 1928 was largely meaningless, and definitely not an action which precipitated the crash and depression. At least, if you believe the numbers JK Galbraith gives us in “1929”:

    Interest rate on brokers loans at year end 1928: 12%

    Brokers loans in contemporary dollars at year end 1928: 6 billion

    GDP in 1929 (BEA wouldn’t go back to ’28):
    100 billion

    from JKG:

    “In principle New York banks could borrow money from the Federal Reserve Bank for 5 per cent and re-lend it in the call market for 12. In practice they did. This was, possibly, the most profitable arbitrage operation of all time”

  25. molten_tofu commented on May 13

    Caveat: Raising interest rates in the 30s, after all the destruction had been wrought, was probably a bad idea.

  26. flytip commented on May 13

    According to the classical theory, changes in the money supply only affect the price level, which is true in the long run. So when the U.S. experienced gold inflows, increasing interest rates was not thought to have a damaging affect on output. And when looking at the interest rates around the year 1930, one has to take into account the impact of inflation/deflation to determine the real rate of interest. When the Fed thought that monetary policy was easy, it in fact was not if you take into account the real rate of interest.


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