Wednesday, January 06, 2010

Economic Savior?

Consider me a skeptic when it comes to many aspects of the economy, including the bailouts of 2008/2009. But I found this article at Time magazine about Federal Reserve Chairman Ben Bernanke very interesting.

As many already know, Time magazine awarded Mr. Bernanke the 'Person of the Year' back in December. It was quite possibly a good pick. I'm certainly glad they didn't pick Barack Obama. I think we've had enough cult-of-personality among the media with Mr. Obama thus far.

As usual, Time explored much about Mr. Bernanke's personal life and background. Including his humble beginnings, which were poignant, and fine for context. But there were other elements of the article that I found particularly interesting. Some highlights:

"[Ben Bernanke] knows that the economy is awful, that 10% unemployment is much too high, that Wall Street bankers are greedy ingrates, that Main Street still hurts. Banks are handing out sweet bonuses again but still aren't doing much lending. Technically, the recession is over, but growth has been anemic and heavily reliant on government programs like Cash for Clunkers, not to mention cheap Fed money. [...] But Bernanke also knows the economy would be much, much worse if the Fed had not taken such extreme measures to stop the panic. There's a vast difference between 10% and 25% unemployment, between anemic and negative growth. He wishes Americans understood that he helped save the irresponsible giants of Wall Street only to protect ordinary folks on Main Street. He knows better than anyone how financial crises spiral into global disasters, how the grass gets crushed when elephants fall."
Personally, I am still not convinced that we were on the verge of such a massive collapse. But I have no doubts that we are certainly headed for one today. We were told about "too big too fail" before. But yet, most of those companies that were "too big to fail before" are even bigger now.  And still largely unregulated. And so, while I believe that the demise of some of them would not have brought down the entire world economy before, there can be no doubt that many current banking institutions have that very potential. And without serious reform — far more than anyone is proposing now — I believe such an outcome is inevitable.
"There was nothing unusual about lowering interest rates to boost a shaky economy, but in December 2008, Bernanke became the first Fed chairman to drop rates as low as they could go."
An important fact that tends to be forgotten among the 'government-isn't-doing-anything-to-help-the-little-guy' narrative.
"A year later, rates remain near zero, for maximum monetary stimulus, and the Fed's rate-setting committee has signaled they will stay there for the foreseeable future."
"Bank runs are even scarier now that they don't require an actual run on an actual bank. Billions of dollars can be withdrawn with a keystroke, and all sorts of nonbank players are now dangerously intertwined with financial markets."
A very real, and very grim fact about the modern world. And yet another argument against the unregulated, so-called "free market" ideology propagated by so many fiscal conservatives and libertarians.
"In June, Bernanke was savaged on Capitol Hill for supposedly pressuring Bank of America to buy Merrill; by December, Bank of America was healthy enough to repay its $45 billion in TARP aid. In fact, all but one of the 19 financial behemoths subjected to stress tests have received decent bills of health, and taxpayers are on track to profit from TARP's wildly unpopular bank bailouts. Bernanke says major financial crises generally cost nations 5% to 20% of their national output. This panic seems likely to cost the U.S. a fraction of 1%. "How much would you pay to avoid a second Depression?" he asks. "I mean, this is a pretty good return on investment."
Another interesting factoid that tends to be unknown, glossed over, or ignored by the media. While many are demanding their own personal bailouts and lament the cost of the huge corporate bailouts, as I've pointed out before, most of it has long since been paid off with interest.
"Bernanke declared in September that the recession was ending, but he says it might feel like a recession for quite a while. Unemployment is a so-called lagging indicator, partly because beat-up businesses tend to be gun-shy about hiring after a downturn and partly because it takes modest growth just to absorb new workers and keep the jobless rate constant."
Another factoid that tends to be forgotten by the common person. People want instant results, but that isn't possible.
"inflation hawks in the blogosphere, Congress and even the Fed's rate-setting committee are warning of new asset bubbles, soaring consumer prices and a collapse of the dollar if Bernanke doesn't reverse course and start tightening the money supply soon."
This is something that I, too, fear. I think we have long since over-extended our economic capabilities.We are forced to rely on artificially-inflated values — bubbles — in order to sustain ourselves.
"Is he saying it's up to Congress to keep jamming on the accelerator with another fiscal stimulus? Well, no. Bernanke supported the $787 billion stimulus last winter, but when asked about a second, he repeatedly refused to bite, saying only that no matter what Congress does, it needs to produce a credible plan to reduce long-term deficits. Basically, he'd like us to make do with the money we've got — no additional borrowing or printing. What he wants Congress to do is reform the system so that big firms can be allowed to fail without risking an apocalypse."
This was one of the few bright spots that I saw. I certainly hope this is Mr. Bernanke's perspective. I, too, believe that some stimulus was necessary, though I believe much of it was misspent. I also disagree with many, like Mr. Krugman, who argue we need more stimulus spending. I think we need to make due with what we have. And now we need both serious reform of the firms that are deemed "too big too fail" — such abominations should not exist and should simply be dismantled ASAP — and we need to make a serious priority out of balancing the trade deficit and the national budget. 

I don't care how bad it will supposedly hurt the economy, I believe we need to get back to fiscal responsibility as fast as possible. I say, get our collective house in order and then start cutting back where possible.

The zeitgiest these days is to make Fed Chairman Ben Bernanke out to be an economic savior. He must see many errors in our economy. And he probabaly has some sound solutions. We have yet to see if he will take substantial enough effort to change them, but I think that, given the circumstancs and his record, it's probably worth implementing many of his ideas. We would probably best be served if he continues on as Chairman of the Fed.

No comments: