It is one thing to be an academic economist or a banker, and it is another thing entirely to be a central banker. As an academic economist, Ben Bernanke was practically without parallel in the 1990's. He wrote Inflation Targeting with Frederic Mischkin and others. He wrote many other articles, "Should Central Banks Respond to Asset Prices," "The Federal Funds Rate and the Channels of Monetary Transmission," and "Inside the Black Box: The Credit Channel of Monetary Policy Transmission." His work had an enormous impact on how central banks around the world operate. Additionally, he is one of the foremost scholars of the Great Depression. What a difference a change in careers makes!
Now, he is practically the scum of the Earth, with even other respected monetary economists such as Allan Meltzer telling him that he has it all wrong. Economists disagreeing with one another is practically our natural state, but this always takes on a new urgency when someone is actually making policy decisions. That's fine, we can disagree and Monday morning quarterback policy makers all day and all night. I just think it is a good time to also remember that Ben Bernanke didn't get this job because he was an idiot. He got it because he was one of the very best monetary economists, and his policy decisions have not varied much from his articles even if he's using novel ways to combat the 0 boundary for the Federal Funds rate.
One of the most challenging parts of being Chairman of the Federal Reserve Board is that he has to take questions from Congressmen and Senators on a regular basis. This is usually an example of an economist speaking about economics to lay people. Most of us who economically inclined will know how challenging that can be under normal standards, but when they are members of Congress or Senators it involves additional... tact.
Here are some example videos with questions from Congressman Ron Paul (R-TX) and Senator Bernard Sanders (D-VT). I acknowledge that it would be unfair to say that Dr. Paul is a lay person in economics, as he has written books on the Austrian school of economics.
Chairman Bernanke holds his ground against some challenging questions that involve some commonly help misconceptions about economics. Congressman Ron Paul is famous for his distaste of the Federal Reserve, but also his distaste for Keynesian economics and that's fine. Usually Dr. Paul is a good speaker of Austrian truth, but here he tip toes over the line with his question, "Is gold money?" What the Austrian school and would like to re-establish is real values, a system of money that is based on gold conversion, without a nominal wax over the top.
That said, few consumers would enjoy lugging around gold in their pockets to buy groceries or a new car! For this reason, it is not a terrific medium of exchange because it is so much more valuable than most items that the average consumer would want to purchase. Bernanke responds correctly, that gold is an asset. Paul continues with a very good second question that I'll paraphrase, why does the central bank hold gold and not diamonds as an asset? Ultimately, they are both right about this, gold is a good store of value, which makes it a good asset for a central bank to hold, and Bernanke is also right that tradition is the main reason that gold is held and not diamonds. The Fed could certainly hold any asset it would like as a reserve to the liabilities that the dollars represent. Steady assets make good reserves, and perhaps gold is the best steady asset, but perhaps the recent run up would suggest that it isn't as steady as normally thought. It's growth has certainly outstripped inflation by large amounts, and perhaps even rational expectations of inflation by substantial amounts as well.
Senator Sanders asks Bernanke some astonishingly naïve questions. His first question about rising inequality is not a bad question at all, but it is an awkward question to ask a central banker. How much control does Senator Sanders think the Federal Reserve has over the American economy? Does he somehow think that Fed policies can influence these trends? Perhaps this makes sense when one remembers that Senator Sanders is the Senate's first self described socialist.
He then seeks to make Bernanke the scapegoat for propping up banks while small business lending has been depressed. While I'm sure that this is largely a bit of political theatrics, Bernanke once again handles it well sticking to his congressional mandate even as a Senator tries to pressure him into have having the Federal Reserve become a lender of last resort to practically anyone! Talk about ruinous economic idiocy! Anyone who cares about the dollar at all or even a hint of sound banking practices should denounce any such ideas.
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| (photo: Medill News Service) |
Now, he is practically the scum of the Earth, with even other respected monetary economists such as Allan Meltzer telling him that he has it all wrong. Economists disagreeing with one another is practically our natural state, but this always takes on a new urgency when someone is actually making policy decisions. That's fine, we can disagree and Monday morning quarterback policy makers all day and all night. I just think it is a good time to also remember that Ben Bernanke didn't get this job because he was an idiot. He got it because he was one of the very best monetary economists, and his policy decisions have not varied much from his articles even if he's using novel ways to combat the 0 boundary for the Federal Funds rate.
One of the most challenging parts of being Chairman of the Federal Reserve Board is that he has to take questions from Congressmen and Senators on a regular basis. This is usually an example of an economist speaking about economics to lay people. Most of us who economically inclined will know how challenging that can be under normal standards, but when they are members of Congress or Senators it involves additional... tact.
Here are some example videos with questions from Congressman Ron Paul (R-TX) and Senator Bernard Sanders (D-VT). I acknowledge that it would be unfair to say that Dr. Paul is a lay person in economics, as he has written books on the Austrian school of economics.
Chairman Bernanke holds his ground against some challenging questions that involve some commonly help misconceptions about economics. Congressman Ron Paul is famous for his distaste of the Federal Reserve, but also his distaste for Keynesian economics and that's fine. Usually Dr. Paul is a good speaker of Austrian truth, but here he tip toes over the line with his question, "Is gold money?" What the Austrian school and would like to re-establish is real values, a system of money that is based on gold conversion, without a nominal wax over the top.
That said, few consumers would enjoy lugging around gold in their pockets to buy groceries or a new car! For this reason, it is not a terrific medium of exchange because it is so much more valuable than most items that the average consumer would want to purchase. Bernanke responds correctly, that gold is an asset. Paul continues with a very good second question that I'll paraphrase, why does the central bank hold gold and not diamonds as an asset? Ultimately, they are both right about this, gold is a good store of value, which makes it a good asset for a central bank to hold, and Bernanke is also right that tradition is the main reason that gold is held and not diamonds. The Fed could certainly hold any asset it would like as a reserve to the liabilities that the dollars represent. Steady assets make good reserves, and perhaps gold is the best steady asset, but perhaps the recent run up would suggest that it isn't as steady as normally thought. It's growth has certainly outstripped inflation by large amounts, and perhaps even rational expectations of inflation by substantial amounts as well.
Senator Sanders asks Bernanke some astonishingly naïve questions. His first question about rising inequality is not a bad question at all, but it is an awkward question to ask a central banker. How much control does Senator Sanders think the Federal Reserve has over the American economy? Does he somehow think that Fed policies can influence these trends? Perhaps this makes sense when one remembers that Senator Sanders is the Senate's first self described socialist.
He then seeks to make Bernanke the scapegoat for propping up banks while small business lending has been depressed. While I'm sure that this is largely a bit of political theatrics, Bernanke once again handles it well sticking to his congressional mandate even as a Senator tries to pressure him into have having the Federal Reserve become a lender of last resort to practically anyone! Talk about ruinous economic idiocy! Anyone who cares about the dollar at all or even a hint of sound banking practices should denounce any such ideas.
Beat Happening "Indian Summer"
Hi Joseph
ReplyDeleteBen Bernanke is running a big business that is owned by rich people so he is doing what he is paid to do which is make his business more profitable. It is called 'conflict of interest'. If he does what the poor wish him to do, the rich would hang him out to dry. The rich will always win until the entire world accepts the fact that the banking system is in serious need of rebuild. Of course, when we change the banking system, everything else changes. It will happen overnight and the new world will be managed by social networks.
About the gold money bit. We don't have enough of the stuff. We can not mine gold as fast as the economy is growing so we allow banks to loan out 10 times (fractional reserve banking) what they have on deposit (can't do that with gold). This means that the bank then collects interest on money that never existed and gives it to shareholders as dividends. Because we need more 'money' than what we have as gold. the value of the gold goes up and the value of the dollar goes down. All us economists know that - don't we ? They don't even bother teaching that in school.
ReplyDeleteWe do not have a shortage of gold. We have a high price of gold, which is based on increased (speculative) demand for gold rather than decreasing supply. If you knew anything about historical banking, you would also know that fractional reserve banking existed under the gold standard.
ReplyDeleteI imagined that this post would attract a fair amount of "gold people." Feel free to read and comment, but please keep your comments intelligent and respectful.
JWW
Hi Mr. Ward. I'm enjoying your website tremendously. I wonder if you would be willing to do a follow-up piece on what would happen if small banks were allowed to print their own money, like they used to do? Would such a system work like the fractional reserve systems, or would it completely crash? What are the disadvantages of that sort of system and why did we move away from it before? And so on.
ReplyDeleteCheers, mate.