Never Let a Serious Crisis Go to Waste
Page 25
One of the most striking features of the economic landscape over the last twenty years or so has been a substantial decline in macroeconomic volatility . . . Three types of explanations have been suggested . . . structural change, macroeconomic policies, and good luck . . . My view is that improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation . . . the policy explanation for the Great Moderation deserves more credit than it has received in the literature.48
His repeated assertion of this thesis in the intervening years went some distance in explaining why Bernanke’s Fed did essentially nothing to curb the worst financial abuses that led up to the crisis of 2007–8; Bernanke had been insisting throughout that the mortgage market was sound, hedge funds were “disciplined,” and the banks solid right up to the onset of the failure of Lehman Brothers. This self-congratulation persisted even though a few inside figures such as the Fed governor Ned Gramlich (who was forced to resign in 2005) and the Atlanta Fed president, Jack Guynn, had been sounding the alarm since 2005. It is difficult to convey in any short space just how much the orthodox economics profession loved this trope of the Great Moderation and its ballyhooed prophet; so much so that it spawned a huge academic literature in its own right. Not only did highly ranked economics journals continue to publish articles discussing the Great Moderation long after the crash rendered the very idea ludicrous, but (having no shame) some tone-deaf economists even argued that the crisis had in no way impugned the existence of a Great Moderation. And neoclassical economists wonder why outsiders tend to snicker at them behind their backs.49
But to return to the Fed: because Bernanke had previously been a Princeton professor, and had been reappointed by Barack Obama, the media and the public seemed to conceive of the curious notion that Bernanke must be some sort of “centrist” or Roosevelt technocrat, and no shill for neoliberal capitulation to the financial sector. When President Barack Obama nominated Bernanke for a second four-year term as chair of the Federal Reserve Board in August 2009, he emphasized Bernanke’s “bold action and outside-the-box thinking” in preventing the financial collapse from turning into another Great Depression. It may have been bold, but the playbook had come directly from inside the neoliberal box, and anyway, Obama himself had yet to learn the pitfalls of prematurely calling a game before the score was in. The orthodox economics profession has been even more effusive; the neoliberal economist Gregory Mankiw “says there is a bizarre disconnect between the chairman’s reputation among experts, who mostly respect him, and the public’s disapproval.” Actually, there is a close affinity between a narrowly defined coterie of “experts” and the Fed; but that is precisely what requires more intense scrutiny.50
One of the great success stories of the NTC has been its ability to keep close tabs on fellow travelers situated among the heathen, so when and if the crunch comes, they might end up controlling “both sides” of any momentous debate. As described in chapter 6, neoliberal politics is generally (at least) a full-spectrum procedure, wherein a neoliberal-inspired “amelioration policy” is frequently paired with a harder-right “market solution.” Think, for instance, of the American “insurance mandate” paired with full privatization of Medicare. Indeed, what greater guarantee of control of the parameters of intellectual possibility could follow an Ayn Rand acolyte than a good old fashioned Friedmanite monetarist?51 Bernanke began his Fed tenure by genuflecting to the (by then long refuted) Friedman tenet that one should try and put the money supply on rule-governed autopilot.52 Bernanke had been a dedicated follower of the neoliberal playbook during the crisis as well, as he admitted in the following testimony to Congress:
Milton Friedman’s view was that the cause of the Great Depression was the failure of the Federal Reserve to avoid excessively tight monetary policy in the early 30s. That was Friedman and Schwartz’s famous book [The Monetary History of the United States]. With that lesson in mind, the Federal Reserve has reacted very aggressively to cut interest rates in this current crisis. Moreover, we’ve tried to avoid collapse of the banking system.53
What this “rescue operation” amounted to began to emerge only after an unprecedented lawsuit brought by Bloomberg (with which the Fed refused to comply) and an act of Congress, which resulted in the disclosure of 21,000 transactions (but not the totality) from late 2007 through 2009.54 Indeed, while Bernanke makes great show of his commitment to “openness,” the Fed under his watch has fought tooth and nail every single attempt to disclose the range of its activities during the crisis, even well after the fact: the Sanders report, the GAO report, and the Bloomberg Freedom of Information Act request. While Fed officials trot out the highly misleading assertion that almost all of the government loans were subsequently repaid and there have been no losses to the public purse, closer scrutiny of the details suggest taxpayers paid a price far beyond the publicly provided numbers (such as the TARP), as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger. The Fed has bestowed upon the banks seemingly permanent options to reward executives and shareholders by capping the downside while permitting an unlimited upside. Over the course of the crisis the Fed made loans of over $7 trillion to financial institutions at negligible rates of interest, with no quid pro quo. Far from regarding the early Bear Stearns rescue as a flashing warning sign that something was very wrong, Bernanke and Tim Geithner reverted to Mission Accomplished mode, unconcerned over what seemed to be going haywire with all those derivatives. They revealed that during the crisis the Fed had been intently picking and choosing which banks and other financial entities to save and which to let fail (Lehman Brothers the egregious sacrifice here), including foreign banks such as Barclays, UBS, Dexia, and Royal Bank of Scotland.55 After a round of stress-test theater, the Fed gave the banks permission to pay out dividends and repurchase stock rather than bolster their equity base. The Fed provided billions in bailouts to banks in places like Mexico, Bahrain, and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. The Fed was also bringing in politically favored individuals and hedge funds to buy derivatives and other securitized debt with government money and government guarantees. Matt Taibbi had some fun pointing out that even wives of the rich and famous were bestowed enormous opportunities to enrich themselves off TALF, a program nominally instituted to support the rancid securities the Fed had permitted to proliferate over the previous decade.56 But few have acknowledged that this was precisely the Depression remedy promoted by Milton Friedman: keep the rich from suffering writedowns or defaulting on their debts so the so-called money supply does not contract inordinately, and everything else will just work itself out fine.
Yves Smith has made the important point that Bernanke tends to justify the sites and instances where the Fed has intervened largely by insisting that private contracts have to be respected; but this is yet another Big Lie from Foggy Bottom. If the contracts favored the banks, such as the credit default swaps written by AIG, then it was permissible to stretch the Fed legal charter by essentially nationalizing an insurance company, or purchasing mortgage-backed securities. (Saving AIG reveals the Bernanke excuse that “we had no legal authority” to save Lehman to be bootless.) However, whenever it was the banks themselves that violated sanctity of contract, from the total travesty of riding roughshod over the chain of title in mortgage securitization, to the defrauding of clients and investors, to reverse long-established principles of creditor hierarchy, then the Fed looked the other way. This was the heart of the Schmittian “exception” explained in the previous chapter. Bernanke is not the great hero saving “capitalism” as portrayed in the many hagiographic accounts;57 rather, he is dedicated primarily to saving the largest banks at all costs, which is not at all the same thing.
Even more damning details of the so-calle
d rescue by the Fed were buried in a little-read GAO report.58 During the crisis, the Fed was printing conflict-of-interest waivers almost as fast as it printed money, precisely because many of the identities of the rescued and the saviors were essentially identical. For instance, the New York Fed president William Dudley was issued waivers to keep his AIG and GE investments all the while he was bailing out those firms. But beyond such garden-variety double-dealing, the Fed followed good neoliberal precepts by outsourcing most of its emergency lending programs to private contractors such as JP Morgan Chase, Morgan Stanley, and Wells Fargo in the form of no-bid contracts. These favored firms then turned around and were lavishly supported by the Fed with near-zero interest rate loans. So much for the deep reserves of independent economic expertise on tap at the Fed. One gets glimpses of why Bernanke doggedly fought the congressional ukase for even a very limited audit of Fed behavior during the crisis.
Indeed, as time passes, it begins to appear that Bernanke presides over little more than a cabal of bankers using public funds to keep themselves in power and riches. Simon Johnson has highlighted the role of Jamie Dimon as benefiting tremendously from the forced and subsidized purchase of Bear Stearns by JP Morgan while he was on the Board of the New York Fed, which was orchestrating the deal. Senator Bernie Sanders has released a list of eighteen other Fed directors who received substantial funding from the Fed during the crisis.59 It appears that “saving the economy” was tantamount to flooding their own banks (and pockets) with liquidity. As more details are leaked, it appears Bernanke provides a thin veneer of academic imprimatur to what can only be regarded as a vast morass of insider dealing.
Bernanke’s Fed has not suffered from what can only be judged an intellectual imbroglio of epic proportions; this has been one of the most glaring instances of economists getting away with murder. Bernanke assiduously deployed the Fed’s prodigious public relations arm and lobbying bench to proclaim that he had taken the extreme but necessary steps in order to keep the Great Recession from turning into another Great Depression; and yet there was very little that was “principled” about this gusher of federal loans and subsidies directed to bail out insolvent organizations headed by people with the right political connections. How was this so very different from the so-called Greenspan put, which had operated the same way with the lesser financial crises during his reign? Yet the orthodox economics profession (including nominally leftist critics, such as Paul Krugman and Joseph Stiglitz) fell right into line, praising the deft perspicuity of the Fed chairman in transforming the Fed into a beacon of financial rectitude and disaster deliverance. Greenspan had made for a convenient pariah once he famously conceded his “error” in congressional testimony of October 23, 2008, but mostly, it served only to divert attention from the even worse behavior of Bernanke.
Ben Bernanke is one major character study in the syndrome of denial that has gripped the orthodox economics profession. All that flimflam about the “Great Moderation” has been blessedly forgotten by the Fed chair, though never actually repudiated. Bernanke insists upon the prodigious intellectual capacity of the Fed to regulate the postcrisis financial sector and the shadow banking sphere, even though he and his former lieutenant at the New York Fed Timothy Geithner had been asleep at the wheel in the run-up to the crisis, and then outsourced much of the bailout. Bernanke has stood in the way of most attempts to restructure the U.S. financial sector, from opposing the Volcker Rule to blocking attempts to break up “too big to fail” firms. Bernanke resisted most attempts to financially penalize banks or hedge funds, with the excuse that they were too fragile to face the music. The Fed’s ability to even anticipate contractions had been persistently addled, dating from the onset of the crisis, as demonstrated in Figure 4.5. His grasp on reality has been tenuous: Bernanke himself had insisted that the subprime mortgage crisis was “contained” as late as March 2007.60 Incredibly, in the face of the mayhem that ensued, Bernanke’s Fed has evaded suffering any consequences for its intellectual incompetence; it still does pretty much whatever it pleases, including continued deregulation of the shadow banking sector and frustrating Elizabeth Warren’s crusade to set up a fully independent consumer finance protection bureau; and yet, even that Great Bank Amnesty was not enough for Ben Bernanke. He decided he had to get the orthodox neoclassical economists off the hook for any conceptual error, as well.
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Figure 4.5: The Fed Projection Misses the Mark
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Source: Federal Reserve, Bureau of Labor Statistics
On September 24, 2010, Bernanke returned to his home turf of Princeton to pronounce absolution upon the orthodox economics profession and, not incidentally, upon himself. It needs to be quoted in extenso in order to convey the hubris of the man:
[The financial crisis] has not been kind to the reputation of economics and economists, and understandably so. Almost universally, economists failed to predict the nature, timing, and severity of the crisis; and those who issued early warnings generally identified only isolated weaknesses in the system . . . As a result of these developments, some observers have suggested the need for an overhaul of the system as a discipline, arguing that much of the research in macroeconomics and finance in recent decades has been of little value or even counterproductive. Although economists have much to learn from this crisis, I think that calls for a radical reworking of the field go too far. . . .
I would argue that the recent financial crisis was more a failure of economic engineering and economic management than of what I have called economic science . . . although the great majority of economists did not foresee the near-collapse of the financial system, economic analysis has proven and will continue to prove critical in understanding the crisis . . . the distinction between economic science and economic engineering can be less sharp than my analogy may suggest, as much economic research has policy implications . . . I don’t think the crisis by any means requires us to rethink economics and finance from the ground up . . .
As it was put by my former colleague, Markus Brunnermeier . . . “We do not have many convincing models that explain when and why bubbles start.” I would add that we also don’t know very much about how bubbles stop, either.61
Bernanke then went on to praise various trends in contemporary neoclassical economic theory, but we cover those in chapter 5, and in any event, they are superfluous in bearing witness to the contradictions embodied in this text. First off, note the intemperate conflation of neoclassical orthodoxy with the totality of “economic theory”—as though there were nothing but barren desert outside its cool oasis. Second, if the orthodoxy was bereft of all understanding of “bubbles,” as he confesses, then in what sense did the Fed possess actionable intelligence as to how to comport itself appropriately once the crisis hit? And third, if all the blame can be lifted from the economics profession and foisted onto “engineers” and “managers,” then where does that leave the Fed and, in particular, the figure of Ben Bernanke? Was he not financial manager-in-chief during the late contretemps? The answer to this third, and most troublesome, question is that Bernanke never once in that lecture concedes that the Fed did anything wrong before or after the crisis, and indeed, in a subsequent lecture, attempted to load the blame on China and the “global savings glut” for the entire episode.62 Those “engineers” and “managers” must be slippery, devious fellows indeed, since they are forever undermining the noble economists, without ever once leaving a visible calling card or forwarding address.
I have had some economists warn me that of course Bernanke had to say stuff like this: for the sake of political stability, he must hew to the party line in public. It is just the Fed Chair Pantomime. I find this implausible, for one major reason: every bit of documentary evidence points to the conclusion that Bernanke subscribes to one of the two major neoliberal catechisms on money. One, the one Bernanke rejects, associated with Hayek and the so-called libertarians like Ron Paul, is that the Fed is the devil, and that
it should be replaced with free banking and pure market control. It would be a little hard to become chairman of the Fed while toeing that line, so Bernanke endorses the Friedmanite alternate: the central bank should be “independent” of all democratic control, preferably run by like-minded neoliberals, but only the market can recognize a bubble, so don’t try to rein in the speculators, but simply clean up afterward by lending freely to the rich people who created the problem in the first place. It is the old neoliberal two-step all over again: Rick Perry and Ron Paul can offer the groundlings red meat by threatening to beat up on Bernanke, and keep the base rabidly opposed to anything that looks suspiciously like the guv’mint; but the major players understand that they need Bernanke (or someone like him) on the inside to support their remunerative activities and ward off anything that smacks of nationalization. You can remain a neoliberal in good standing quite comfortably without subscribing to the free banking fringe, because you are useful. And it is the economics profession that makes the straddle work on a daily basis.
Here we encounter one of the major pieces of evidence that the Federal Reserve Bank is an avowedly neoliberal institution, and one that relies upon its major symbiotic relationship with the American economics profession to skew its membership in a neoliberal direction.63 I have just demonstrated that the last two chairmen of the Federal Reserve System were card-carrying neoliberals; but moreover, the entire governance structure of the Federal Reserve has evolved to guarantee responsiveness to its main constituency, the pinnacle of finance. As Dean Baker has written, few realize that “The Fed has been deliberately designed to insulate it from democratic control and leave it instead a tool of the financial industry.”64 The member private banks “own” stock in the regional Feds, and indeed, are paid dividends on their stock.65 The twelve regional Feds are governed by nine-member boards, six elected by member banks, and the remaining three by the Board of Governors.66 Each of the twelve regional Federal Reserve Banks is a separately incorporated not-for-profit that is privately owned by the member banks in its district. Further, the entire Fed system is self-funded from its operations, freeing it from the rigors of an external budgetary control or any serious accountability. The Federal Reserve Board of Governors, to be sure, has seven members appointed by the president and confirmed by the Senate for nonrenewable fourteen-year terms; but almost inevitably they are chosen from those with previous experience in the regional Feds, or representatives of the banks or Treasury, although they may have concurrently served as academics. The Fed is technically run by the twelve regional Fed presidents plus the seven-member Board of Governors. Substantial power is vested in the chairman of the board, also appointed by the president for renewable four-year terms. This neither-fish-nor-fowl organization chart dating from 1935 has admirably served to camouflage many of the activities of the Fed in the past.67 Indeed, the Fed is a bulwark of industry “self-regulation,” decked out as government entity dedicated to the public welfare; a sheep in wolf’s clothing.