The Eternal Sunshine of the Spotless Conscience…
By Monty Pelerin
Sometimes a seminal event passes unnoticed. Subsequent developments and hindsight eventually place it in proper perspective. Just such an event may have happened or be in the process of playing out regarding Ben Bernanke, Chairman of the Federal Reserve.
Ben Bernanke’s Warning
Mr. Bernanke expressed the following regarding the precariousness of our economic and financial situation (my emboldening):
By definition, the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis.
This statement could have been issued by innumerable internet pundits. Warnings like these are commonplace from so-called internet whack-jobs. But this one came from Ben Bernanke in recent remarks to Congress. Gentle Ben is not one to exaggerate (unless it is toward the positive). His track record for forecasting has consistently erred on the side of optimism, whether it was the housing crisis, the spread of financial contagion or the condition of the economy.
Something’s Changed
These comments differ so sharply from Bernanke’s past pronouncements that one must wonder what has happened. Has Gentle Ben suddenly realized the seriousness of our situation? Have economic matters taken a sudden turn for the worse? This pronouncement signals something different. Is it political? Will it also prove to be overly optimistic, like the rest of Bernanke’s prognostications?
The answer to the first question is almost certainly “no.” It is likely Bernanke understood the gravity of the economic problems either from the beginning or shortly thereafter. And that is what makes his recent comments so important. They could (should) have been made a few years ago.
The comments signal a potential major shift in Bernanke’s public position, one that puts him at odds with the Obama Administration. Bernanke’s counterpart at Treasury, one Tim Geithner, continues to talk loudly, maintaining with a fool’s certainty that everything is fine:
Geithner April 2011: “Is there a risk that the United States could lose its AAA credit rating? Yes or no?” – Tim Geithner: “No risk of that.”
….
Geithner April 2012: “If we don’t deal with these debt problems we are going to be Greece in two years” – Tim Geithner: “No risk of that.”
Turbo Timmy stays on message, whistling the Administration’s happy tune of recovery. Geithner works directly for the Administration, making his behavior understandable, especially in an election year.
Bernanke, by contrast, was appointed by Bush and as Fed Chief is supposed to be independent of politics. That independence has pretty much been a myth in the last three or so decades and Bernanke, although feigning independence, has effectively worked for whichever administration happens to be in power. But these recent comments stand in juxtaposition to Geithner’s and the message of the current Administration.
Does Bernanke Play Poker?
Bernanke may not be a good forecaster, but surely he understands the arithmetic of out-of-control spending, deficits and the inevitable ending they produce. He knows they lead a country to the graveyard of history.
Whether Ben Bernanke plays poker or not is beyond my knowledge. Obviously he plays political poker as anyone who operates at the highest levels of government must. My guess is that Bernanke, understanding where the economic crisis is heading, looked around the political poker table and was unable to spot a “mark.” As poker players know, when you can’t identify the mark, it means you are it. Bernanke concluded that he has been set up to be that guy and will be left holding the bag when the economic collapse occurs.
The political class has not cut spending nor even slowed down the rates of increase. There is no indication they ever intend to do so. This behavior has been enabled by Ben Bernanke by his funding of the deficits. He has been used by the political class. He is the Great Enabler who funded the political sickness of spend, spend, spend. As such he has participated in the eventual destruction of the country. He made all the damage possible by continuing to feed the political appetite for unconstrained spending.
Bernanke has been used as a pawn in the great political game. As an unelected official, he will make the perfect scapegoat when the wheels come off of the economic and financial systems. Comments like the following suggest Bernanke may have finally awakened to the fact that he is being used :
Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living. Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, resulting in further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult.
These are not the comments a politician utters during an election year. Nor are they comments that the political class wants disseminated to the masses. Gentle Ben may have awakened to the fact that he will be history’s scapegoat when this mass of fecal matter eventually hits the fan.
What Does This Mean?
If Bernanke has awakened to the fact that he will be the fall guy for what is coming, what does that mean? Can he do anything about it?
Mr. Bernanke seems to be a proud and honorable man. One might question his judgment pursuing and gaining the role of Fed Chairman in such troubled times. Whether it was the siren song of power or the belief that he could serve his country is irrelevant. Undoubtedly he believed his knowledge and tools could solve the world’s financial problems.
Although I disagree with his choice of Keynesian tools, no set of tools can solve a problem that politicians insist on making worse.
Now that Mr. Bernanke realizes that his efforts cannot succeed, what is he to do? In his mind, he has likely seen his dream of being remembered as the world’s savior with respect to the economic crisis to the guy whom history will ultimately blame for the disaster that lies ahead. It is likely this shocking realization produced the recent change in his public presentation.
Realizing what is happening and doing something about it are two different things. Mr. Bernanke is a mild-mannered professor playing in a game with ruthless power brokers. He is ill-equipped emotionally and otherwise to take them on. Quite simply, he is out of his league.
Mr. Bernanke has only two options:
- Take away the punch bowl now.
- Continue to be the Great Enabler with respect to political spending.
John Law or Herbert Hoover
Option number one plunges the country into an immediate Depression. History would blame him Bernanke. He would be remembered as the new Herbert Hoover. Option number two leads to hyperinflation. History would also blame Bernanke and he would be remembered as the new John Law.
Mr. Bernanke is in a pickle from which there is no favorable exit. At this point, he is literally guaranteed to be remembered as one of the great failures in history. He may have control over which route he takes, although even that may not be his choice. If he were to attempt to remove the punch bowl, it is likely he would be replaced. But his removal would signal failure, further ensuring that history would associate him with the economic tragedy that lies ahead.
Mr. Bernanke seems to be trying to construct a third option, a kind of CYA attempt. His recent statements can be viewed either as an attempt to alter the behavior of the political class (that will not happen, at least not because of Bernanke) or, if he cannot, provide the cover for him to be able to say: “Don’t say I didn’t warn you.”
Sadly for us and him that it took so long for to figure out what was happening. It is too late to avoid the inevitable, and there is nothing Mr. Bernanke can do to salvage a favorable position in history. He will be just another well-meaning man, chewed up by the power elite.
He will have a place in history, although unlike any he imagined. My guess is that he (or his successor) will choose to leave the punch bowl in place, ensuring Mr. Bernanke’s place in history as the new John Law.
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