Bernanke, Greenspan and the hubris of central bankers

Christopher Westley takes a sideways look at how both the current and former Fed chairmen have attempted to evade blame for the subprime debacle.

(Hubris(n): excessive pride or self-confidence.)

Due to credible competition that has emerged among this year's candidates for the Hubris in Monetary Policy Award, the Award Committee has announced that it is officially deadlocked.

The competition is centered on two candidates. Take, for instance, the submission by Federal Reserve Chairman Ben Bernanke, who provided remarkable testimony to the US House of Representatives' Financial Services Committee last month. In it, he argued that the subprime crisis could be blamed, in part, on the Fed's (and his own) effectiveness. It is not that Fed policies did not contribute to the situation, he said, but that long-term rates, made lower by low inflation expectations, played a greater role.

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This is, of course, the old 'as the 10-year Treasury yield goes, so goes the mortgage market' argument, and frankly, it made the Hubris Committee take notice. Bernanke was arguing that if the Fed just wasn't so gosh-darn effective, long-term rates would be higher, but since they're not, too many people took out loans that they shouldn't have. It would seem that the trade-off for lowered inflation expectations is increased moral hazard.

We thought we had a winner, especially since everyone in that hearing room knew that Congressional mandates to Fannie and Fred to buy up mortgages up to $417,000 are what caused much of the malinvestment that Congress welcomed as political cover during the last recession. But as if that weren't enough, Bernanke even added to his hubristic credentials by suggesting that the solution to the crisis should involve allowing Fannie and Fred to buy up mortgages of sums greater than $417K, but only temporarily. He didn't give a date for when this 'credit surge' should end, but we can safely assume there was agreement among the honorable congressmen for a timeframe ending sometime after November 4, 2008.

If Bernanke's testimony was a worthy effort, so was that of Yale's Robert Shiller, whose forthcoming article in Brookings Papers on Economic Activity argues that sector-specific booms in areas like stock or real estate prices have little to do with long-term interest rates. Shiller's argument impressed the committee for two reasons. First, it was brazen because for one to accept it, one had to assume that increases in M actually do not cause increases in P. Is this what they are teaching at Yale, the former stomping grounds of Irving Fisher?

Second, it was incredibly weak. Shiller could not bring up (say) the writings of the classical economists on the quantity theory over the last two centuries, to say nothing of the monetary contributions of Ludwig von Mises, Murray Rothbard, Leland Yeager, and Milton Friedman. Nor did he (or could he) provide any statistical analysis (which even Card and Krueger did). Instead we are not making this up he supported his thesis by counting references to Milton Friedman in newspapers and references to real interest rates in annual reports.

And he still made Brookings Papers. Although the committee couldn't agree to give the award to Shiller, it did agree that he is aptly named.

But we couldn't agree to give the award to Bernanke either. We had deadlock and quorum issues, which surprised us because we never had this problem in days gone by, when Alan Greenspan was eligible for the award.

In the midst of our quandary, the former Fed chairman began promoting his new book, The Age of Turbulence, and someone noted that he would be best suited to solve our dilemma.

This only makes sense, since his autobiography reestablishes his credentials as a master hubricist who is uniquely qualified for the task. In it, he:

polishes his image as an inflation hawk, even when his $8 million advance computes to just over half that amount when expressed in the value of the dollar in 1987 (the year he was appointed to the Fed chair);

touts his service as president of Gerry Ford's Council of Economic Advisors when Ford's solution to 1970s-era inflation had less to do with (say) the money supply than with W.I.N. buttons;

humbly notes that '[i]t wasn't that I wanted to stand up and shout 'the stock market is over-valued' but I thought it important to put the issue on the table' after Morgan Stanley's Stephen Roach chronicled from FOMC transcripts how putting the issue on the table was the Fed's only response to that sector-specific bubble of the frothy 1990s;

blames the subprime crisis on the fall of communism, as if millions of workers in the military-industrial complex suddenly switched from sword to plowshare production (when quite the opposite is the case), somehow necessitating low-interest mortgages;

feigns shock that George H.W. Bush would accuse him of mistiming the political business cycle to help Clinton in 1992 by writing, 'I was saddened when I discovered that he blamed me for his [election] loss. His bitterness surprises me. I did not feel the same way about him.'

There is, of course, much more. In fact, the committee believes the sections on the 1987 stock market crash and the sections on the war in Iraq will be required reading in future college courses on the history of hubris.

So the committee is requesting the help of former Hubris Award winner Alan Greenspan to serve on one more committee, just this one more time, to solve our impasse.

Mr G: Please send a $100 bill to the Hubris in Monetary Policy Award Committee and write Bernanke or Shiller's name on the back. After all, since both men promote the myth that that inflation is only sometimes and only in some places a monetary phenomenon, they have your back as well.

By Christopher Westley for