Ben Bernanke’s Tenure at the FED

Economics Without The B.S.**: Ben Bernanke’s Tenure at the FED

[**  Double entendre intended.]

Ben Bernanke’s Tenure at the FED:

An Appraisal of the Bailout – Part I

It is difficult to say just how serious the Financial Crisis of 2008 was; but, by judging just from the Fed bailout alone that totaled into the trillions of dollars you can get a pretty good idea.  The Fed, under Ben Bernanke’s leadership went to extraordinary measures to rescue the financial sector of not just our economy but also the world economy.

Bernanke is a well-studied student of our Great Depression of the 1930s and of the 19^th Century English writer Walter Bagehot.  The financial sector of the market is like the oil in your car’s engine – it is the lubricant that keeps transactions going in the business world.  When the financial sector freezes up (i.e., financial liquidity comes to a halt), the transactions stop flowing and the economy comes to a standstill and people suffer the consequences.  The prescription for a freeze-up in the market is to add liquidity, not just add liquidity but flood the market with liquidity, as Bagehot said in the 19^th Century and as Bernanke did in the last quarter of 2008 and throughout 2009.  In the days of Central Banking, this means the Fed becomes the lender of last resort by buying assets in the financial sector (that may be undervalued as a result of the freeze-up or because they were bad investments to begin with) with Government treasuries that are more highly esteemed during times of financial stress.

Ben Bernanke studied the Great Depression of the 1930s and knew the failure of the Fed to take action at that time contributed to the hardships.  During the initial collapse of the market at the outset of the Depression combined with the initial tight monetary policies of the Fed to “cool off” the speculative fever of the 1920s resulted in a three year period where you had a deflationary spiral that almost reached 30%.  While deflationary spirals have negative consequences for everyone, it particularly hits debtors (people who borrow) the hardest because they cannot afford to make loan payments with earnings based on deflated dollars or income that has been cut by half.  Their failure to make payments of course affects creditors negatively also.  But among the debtors are your investors, the entrepreneurial class, who too often use extended credit for their investments.  When this entrepreneurial class gets hit, investment ceases, and economic growth collapses, and the economy shrinks.  During the Great Depression, the GDP shrank from around a little over $100 billion during the Roaring ‘20’s to a little over $55 billion during the depth of the Depression during the ‘30s.  This calamity is what caused the Great Depression to last so long until a recovery could be generated, mainly from the outbreak of WWII which created a demand for goods.

In 2008 our economy was around $14 trillion.  So if you are critical of the Fed actions under Ben Bernanke with the bailout of Wall Street at the expense of Main Street, think where you would be today if the economy went into a deflationary spiral and GDP shrank to $8 trillion?  And for those who would be opposed to any bailout on the grounds of moral hazard, I would ask:  If it took WWII to get us out of the Great Depression, what do you think would get us out of the Financial Crisis of 2008 if we had no bailout?