No doubt about it, Ben Bernanke saved the world from a depression
The chairman of the US Federal Reserve is criticised for not seeing the 2008 financial crash coming.
Dillon, South Carolina, a small town close to the border with North Carolina, has for the past 50 years been home to a roadside attraction called South of the Border, known to the locals as SOB. Travelling north or south on Interstate 95, you see signs advertising the attraction - which claims to be "America's favourite highway oasis" - every five miles or so for at least 100 miles. Its mascot, Pedro, a grinning moustachioed chappie wearing an oversized sombrero, is on every billboard. He also straddles the entrance, standing 97ft tall on "the largest freestanding sign east of the Mississippi". It is especially impressive that you can drive between his legs.
On arrival at South of the Border, you can eat and drink (a diner lures visitors with the line "Chile today, hot tomale"), but mainly you can shop for all sorts of plastic stuff made in China. It is the kind of place my friend Bill Bryson would love, as he is really into tat. The attraction's main claim to fame, though, is that it has a famous former employee - Ben Bernanke, chairman of the US Federal Reserve. Bernanke waited tables in a restaurant at South of the Border before studying at Harvard and worked there during the summers to support himself through college. Bernanke served as head of Princeton University's economics department from 1996 to 2002, when he became a member of the board of governors of the Federal Reserve System.
In June 2005, he was named chairman of President George W Bush's Council of Economic Advisers, and in February the following year Bush appointed him to a 14-year term as a member of the Fed's board of governors and to a four-year term as chairman. In January 2010, he was confirmed as chairman for a second term after being nominated by President Barack Obama.
Bernanke had a distinguished academic career as an economist, his diverse publications including a number of widely used undergraduate textbooks. He is one of the world's foremost authorities on the Great Depression and has written about the harmful consequences of deflation. He was the right man in the right place at the right time when the biggest financial crisis in 100 years hit. I believe that Bernanke prevented the world from entering another major depression.
The Fed can be criticised for not seeing the collapse coming and for being too lax on regulation in the early years of the millennium. Since 2006, however, it has conducted monetary policy in an exemplary way. It started cutting the federal funds rate in September 2007, before the US economy went into recession (which it did, according to the National Bureau of Economic Research's business cycle dating committee, in December 2007), and quickly moved rates to zero. It also acted promptly to raise liquidity and purchase assets including mortgage-backed securities.
In contrast, both the Bank of England and the European Central Bank failed to cut rates until well after their economies entered recession, with severe negative consequences. Now the ECB has begun raising rates again, which looks like another grave error, given that the inflation shock is transitory and wage growth is benign.
At its rate-setting meeting at the end of last month, the Fed once again kept the federal funds rate at a range of 0 to 0.25 per cent. In its statement, the Federal Open Market Committee said that it "continues to anticipate that economic conditions, including low rates of resource utilisation, subdued inflation trends and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period".
Notably the Fed argued that "increases in the prices of energy and other commodities have pushed up inflation in recent months. The committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations."
For the first time, the Fed's chairman gave a press conference after the rate decision was announced. The financial world watched Bernanke give a masterful performance: he said very little and made no major missteps. His job was to calm nerves and prepare the way for the day the Fed does make a change. Judging by his comments, that day does still seem a long way off, though he refused to be drawn on how long an "extended period" is.
The death of Osama Bin Laden pushed not one, but two would-be Republican presidential candidates off America's front pages. First, "the Donald's" aspirations were weakened, to say the least, by the release of Obama's long-form birth certificate. Then Trump's potential rival Ron Paul issued a statement on Bernanke's press conference. Paul is the libertarian chairman of the US House financial services subcommittee that monitors the Fed. He has the most conservative voting record of any Congress member since 1937, and wants to abolish the Fed and return to the gold standard. And you thought Trump was bonkers? Here is the core of Paul's statement.
Mr Bernanke continues to ignore his culpability for the inflation all Americans suffer due to the Fed's relentless monetary expansion. Rising prices are the direct result of Fed devaluation of our dollar. Yet rather than addressing the Fed's loose dollar policy, Mr Bernanke continues to assure us that inflation is not a problem . . . And now the Fed's additional trillions of dollars in monetary pumping is creating yet another bubble. This is the exact opposite of stability in the marketplace and has nothing to do with free markets. It is central economic planning at its worst. And the end result may be hyper-inflation and the destruction of our currency.
Barking mad. Consumer Price Index inflation in the US is 2.7 per cent and there is no prospect of hyperinflation or the dollar's collapse. Fortunately, all the checks and balances in the US system prevent the Fed's abolition or a return to the gold standard. And trust me, there is no chance that either Trump or Paul will become president.
The contrast with Britain is stark. Only now do I fully appreciate the great job that John McFall and his successor Andrew Tyrie have done chairing the Treasury select committee. Imagine the Bank of England's governor, Mervyn King, dealing with the likes of Ron Paul.
David Blanchflower is NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling
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