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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.

Masterful performance

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.

Gold standard

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

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 09 May 2011 issue of the New Statesman, Beyond the cult of Bin Laden

Photo: Getty Images
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What's to be done about racial inequality?

David Cameron's words on equal opportunities are to be welcomed - now for some action, says Sunder Katwala.

David Cameron made the strongest, clearest and most high profile statement about ethnic inequalities and the need to tackle discrimination ever yet offered by a British Prime Minister in his leader’s speech to the Conservative Party conference in Manchester.
“Picture this. You’ve graduated with a good degree. You send out your CV far and wide. But you get rejection after rejection. What’s wrong? It’s not the qualifications or the previous experience. It’s just two words at the top: first name, surname. Do you know that in our country today: even if they have exactly the same qualifications, people with white-sounding names are nearly twice as likely to get call backs for jobs than people with ethnic-sounding names? … That, in 21st century Britain, is disgraceful. We can talk all we want about opportunity, but it’s meaningless unless people are really judged equally”, said Cameron.
While the proof of the pudding will be in the eating, this was a powerfully argued Prime Ministerial intervention – and a particularly well-timed one, for three reasons.

Firstly, the Prime Minister was able to root his case in an all-but-universally accepted appeal for equal opportunities. It will always prove more difficult in practice to put political energy and resources behind efforts to remedy discrimination against a minority of the population unless a convincing fairness case is made that values cherished across our whole society are at stake. Cameron’s argument, that any party which tells itself that it is the party of the ‘fair chance’ and ‘the equal shot’ must have a response when there is such clear evidence of discrimination, should prove persuasive to a Conservative Party that has not seen race inequalities as its natural territory. Cameron argued that the same principles should animate responses to discrimination when it comes to race, gender and social class. Put like that, wanting job interviews to be fair – by eradicating conscious and unconscious patterns of bias wherever possible – would strike most Britons as offering as clear a case of the values of fair play as wanting the best baker to win the Great British Bake-Off on television.
Secondly, Cameron’s intervention comes at a potential "tipping point" moment for fair opportunities across ethnic groups. Traditionally, ethnic discrimination has been discussed primarily through the lens of its impact on the most marginalised. Certainly, persistent gaps in the criminal justice system, mental health provision and unemployment rates remain stark for some minority groups. What has been less noticed is the emergence of a much more complex pattern of opportunity and disadvantage – not least as a consequence of significant ethnic minority progress.

Most strikingly of all, in educational outcomes, historic attainment gaps between ethnic minorities and their white British peers have disappeared over the last decade. In the aggregate, ethnic minorities get better GCSE results on average. Ethnic minority Britons are more likely, not less likely, to be university graduates than their fellow citizens. 

As a result of that progress, Cameron’s intervention comes at a moment of significant potential – but significant risk too. Britain’s ethnic minorities are the youngest and fastest-growing sections of British society. If that educational progress translates into economic success, it will make a significant contribution to the "Great British Take-Off" that the Prime Minister envisions. But if that does not happen, with educational convergence combined with current ‘ethnic penalties’ in employment and income persisting, then that potential could well curdle into frustration that the British promise of equal opportunities is not being kept.  Cameron also mirrored his own language in committing himself to both a ‘fight against extremism’ and a ‘fight against discrimination’: while those are distinct challenges and causes, actively pursuing both tracks simultaneously has the potential, at least, depolarise some debates about responses to extremism  - and so to help deepen the broad social coalitions we need for a more cohesive society too.

Thirdly, Cameron’s challenge could mark an important deepening in the political competition between the major parties on race issues. Many have been struck by the increase in political attention on the centre-right to race issues over the last five to ten years. The focus has been on the politics of representation. By increasing the number of non-white Conservative MPs from two to seventeen since 2005, Cameron has sent a powerful signal that Labour’s traditional claim to be ‘the party of ethnic minorities’ would now be contested. Cameron was again able to celebrate in Manchester several ways in which his Cabinet and Parliamentary benches demonstrate many successful journeys of migrant and minority integration in British society. That might perhaps help to ease the fears, about integration being impossible in an era of higher immigration, which the Home Secretary had articulated the previous day.

So symbolism can matter. But facial diversity is not enough. The politics of ethnic minority opportunity needs to be about more than visits to gurdwaras, diversity nights at the party conference fringes and unveiling statues of Mahatma Gandhi in Parliament Square. Jeremy Corbyn’s first speech as Labour leader did include one brief celebratory reference to Britain’s ethnic diversity – “as I travelled the country during the leadership campaign it was wonderful to see the diversity of all the people in our country” – and to Labour bringing in more black, Asian and ethnic minority members - but it did not include any substantial content on discrimination. Tim Farron acknowledged during his leadership campaign that the Liberal Democrats have struggled to get to the starting-line on race and diversity at all. The opposition parties too will no doubt now be challenged to match not just the Prime Minister’s rhetorical commitment to challenging inequalities but also to propose how it could be done in practice.

Non-white Britons expect substance, not just symbolism from all of the parties on race inequalites.  Survation’s large survey of ethnic minority voters for British Future showed the Conservatives winning more ethnic minority support than ever before – but just 29 per cent of non-white respondents were confident that the Conservatives are committed to treating people of every ethnic background equally, while 54 per cent said this of Labour. Respondents were twice as likely to say that the Conservatives needto do more to reach out – and the Prime Minister would seem to be committed to showing that he has got that message.  Moreover, there is evidence that ethnic inclusion could be important in broadening a party’s appeal to other younger, urban and more liberal white voters too – which is why it made sense for this issue to form part of a broader attempt by David Cameron to colonise the broad centre of British politics in his Manchester speech.

But the case for caution is that there has been limited policy attention to ethnic inequalities under the last two governments. Restaurateur Iqbal Wahhab decided to give up his role chairing an ethnic minority taskforce for successive governments, unconvinced there was a political commitment to do much more than convene a talking shop. Lib Dem equalities minister Lynne Featherstone did push the CV discrimination issue – but many Conservatives were sceptical. Cameron’s new commitment may face similar challenges from those whose instinct is to worry that more attention to discrimination or bias in the jobs market will mean more red tape for business.

Labour had a separate race inequalities manifesto in 2015, outside of its main election manifesto, while the Conservative manifesto did not contain significant commitments to racial inequality. The mid-campaign launch in Croydon of a series of race equality pledges showed an increasing awareness of the growing importance of ethnic minority votes - though the fact that they all involved aiming for increases of 20 per cent by 2020 gave them a slightly back-of-the-envelope feel. 

Prime Ministerial commitments have an important agenda-setting function. A generation ago the Stephen Lawrence case opened the eyes of middle England to racist violence and police failures, particularly through the Daily Mail’s persistent challenging of those injustices. A Conservative Prime Minister’s words could similarly make a big difference in the mainstreaming of the issue of inequalities of opportunity. What action should follow words? Between now and next year’s party conference season, that must will now be the test for this Conservative government – and for their political opponents too. 

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.