Ever since the crash, Alan Greenspan has been almost as hard to spot in public as bin Laden has been. Like bin Laden, we hear from Greenspan every once in a while via a well-scripted speech. Unlike bin Laden, however, Greenspan does not take responsibility for his actions.
The "maestro" of worldwide prosperity (as he was called during the boom) first blamed the crisis on an undue or irrationally exuberant faith in capitalism. The Fed had nothing whatsoever to do with the real estate bubble, he informed a congressional committee. More recently, he blamed the whole mess on Asians who, unlike most Americans in recent decades, tend to save some of their income. Greenspan’s replacement, Ben Bernanke, also embraced this "Yellow Peril" explanation for the crisis in a March 10 speech before the Council on Foreign Relations. This latest rendition of what might be called Greenankeism goes as follows, quoting Bernanke:
[I]t is impossible to understand this crisis without reference to the global Imbalances in trade and capital flows that began in the latter half of the 1990s. In the simplest terms, these imbalances reflected a chronic lack of saving relative to investment in the United States . . . , combined with an extraordinary increase in saving relative to investment in many emerging market nations [especially] East Asian economies . . . . Like water seeking its level, saving flowed from where it was abundant to where it was deficient, with the result that the United States and some other advanced countries experienced large capital inflows for more than a decade . . .
The problem with this, says Bernanke, is that "the risk management systems of the private sector" failed to "ensure that the inrush of capital was prudently invested." In addition, there was too little government "oversight of the financial sector of the United States."
Every bit of this is wrong. As economist Robert Murphy has discovered, there indeed was in increase in savings in the "emerging economies" during the housing boom in the U.S., but it continued on during the bust as well. How can increased savings by East Asians cause both an increase and a decrease in interest rates?
In addition, Murphy found that the global savings rate actually declined during the early 2000s compared to what it was during the preceding fifteen years. Thus, if one counts all capital flows, economic reality is the opposite of what Greenankeism says it is.
In addition, it is worth noting that the Fed employs hundreds of economists both as direct employees and as contract employees, and many of them are supposed to keep track of international capital flows. If Greenspan and Bernanke are so certain of the calamitous effects of such "influxes" of capital, why weren’t they warned about it? Why didn’t they warn us before the bust? These are rhetorical questions, of course.
As Frank Shostak has noted, Greenspan and Bernanke define "savings" merely as the amount of U.S. dollars that "emerging economies" held. What this represents is a change in who owns the dollars, not an increase in dollars. The fall in long-term interest rates that fueled the boom (and the accompanying massive mal-investment) can only be caused by the Fed’s money creation, which increases the total amount of dollars in circulation.
Bernanke’s statement that there was too little regulatory oversight of financial institutions is preposterous nonsense. The Fed itself exerts massive regulatory control, as do myriad other regulatory institutions, from the FDIC to the IRS, Office of Thrift Supervision, SEC, Comptroller of the Currency, Congress itself, and dozens of state regulatory agencies.
For more than thirty years the Fed has enforced the Community Reinvestment Act, which has forced banks to make hundreds of billions of dollars in bad loans to un-creditworthy, "sub-prime" borrowers in the name of the government’s overall policy of "affordable housing." Fannie Mae and Freddie Mac, two government-sponsored enterprises, "securitized" these loans to take the risk away from lenders (supposedly). Even banks and other lenders that were not under the thumb of the Fed regulators and the CRA participated in the sub-prime lending spree because if they didn’t, their government-controlled competitors would — at least during the boom — out-earn and outcompete them. As Bernanke himself said in a March 30, 2007 speech entitled "The Community Reinvestment Act: Its Evolution and New Challenges," so-called securitization of bad, sub-prime loans "expanded . . . in part reflecting a 1992 law that required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a large percentage of their activities to meeting affordable housing goals" (emphasis added).
The Fed also threatened mortgage lenders with gigantic fines for violating the equal opportunity lending laws in a widely-distributed (to lenders) publication entitled "Closing the Gap: A Guide to Equal Opportunity Lending," published by the Boston Fed. This government publication instructed mortgage lenders to: 1) ignore traditional measures of creditworthiness for "minority and low-income consumers"; 2) ignore traditional underwriting standards for the same group; 3) ignore traditional ratios of mortgage payments to monthly income as well; 4) ignore "lack of credit history" for minority and low-income consumers; 5) seek Fed assistance in finding a different property appraiser if the original appraisal does not "come out right"; and 6) rely on Fannie Mae and Freddie Mac to purchase the bad loans. This is one example of how Bernanke defines "not enough oversight of financial institutions."
Either Ben Bernanke has no understanding of how markets work and is equally ignorant of the massive regulatory influence the government has on housing and financial markets, or he is lying through his teeth when he says that under-regulated markets have run amok. The former is a possibility since Bernanke is a "macroeconomist." So-called macroeconomics has never been real economics but rather an endless series of engineering-type models purporting to guide politicians in centrally planning an economy. In the bizarro world of macroeconomics all capital is the same, and all workers are the same, as one big lump, expressed as "K" and "L" in the models. Relative prices and their role in allocating resources in a market economy are mostly ignored, while "economic aggregates" are said to influence "the" price level.
In macroeconomics it is taken as a given that markets are incapable of allocating resources in an acceptable way; that’s why there is supposedly a need for macroeconomic central planning in the first place. No such "failures" are assumed on the part of the macroeconomic central planners.
The opportunity cost of studying macroeconomics during one’s formal education is that that time is not spent learning real economics — the economics of human action and the market process. Nor is it spent studying political economy or the effects of the interaction between the economy and the state. Instead, one spends one’s time trying to make sense of obtuse mathematical models and graphs that sometimes take ten or more weeks of a college semester to "build" and interpret. Such is the witchcraft of macroeconomic "models." Models that utterly failed to predict or explain the current crisis, I would add.
During the Q&A session after Bernanke’s Council on Foreign Relations speech he took on an extraordinarily smug and arrogant tone as he explained that, during his academic career at Princeton, he was aware of "a few" people in the economics profession who believed that markets did a better job than central planners like himself, but that he hoped "there are no longer any people like that around." "We’re all socialist central planners now" is essentially what he was saying, some two decades after it was proven beyond all doubt that attempts to centrally plan an economy invariably lead to nothing but economic and human catastrophe.
The main purpose of Bernanke’s speech before the Council on Foreign Relations was to promote the creation of a new super central-planning agency that he called the "Systemic Risk Authority." This central planning agency would pursue "close supervisory oversight" of all risk taking by financial firms. It would be one big monopoly regulator with "consolidated supervision of all systematically important financial firms." Of course, the government itself would determine which firms were "systematically important," and empire-building bureaucrats would eventually decide that ALL firms qualified to be "supervised" by them.
Either Ben Bernanke is completely ignorant of the vast literature on the causes of the failures of socialist central planning, the economics of bureaucracy, the economics of public choice, the economics of regulation, the field of law and economics, and of markets, risk taking and entrepreneurship, or he is simply another evil, opportunistic, egomaniacal, empire-building bureaucrat who lives in a world of delusions surrounded by equally delusional sycophants. No group of government bureaucrats could ever conceivably possess and process the millions upon millions of pieces of information that go into the day-to-day risk assessments of thousands of financial institutions in an economy the size of the U.S. And even if they could, there would not be any market feedback mechanism, whereby good risk assessments are rewarded with profits and bad ones penalized by losses. There are no profit and loss statements in government, and thus no means of measuring success and failure. In fact, in government, failure is success: the worst the performance, the greater amount of funds that is "thrown" at the problem.
Such an "Authority" (and its congressional sponsors) would be relentlessly lobbied by financial corporations to prohibit the risk-taking and investing by their rivals and to allow their own equally risky ventures. "Rent seeking" (or plunder seeking, if you will) would become even more rampant than it already is, becoming a major engine of wealth destruction. Bernanke is oblivious to all of this, even though it is something that any graduate student in economics should know. To paraphrase P.J. O’Rourke, author of Parliament of Whores, a book about Congress, giving Ben Bernanke — or any Fed chairman — money-printing ability and regulatory power is like giving whiskey and car keys to teenage boys.
Thomas J. DiLorenzo [send him mail] is professor of economics at Loyola College in Maryland and the author of The Real Lincoln; Lincoln Unmasked: What You’re Not Supposed To Know about Dishonest Abe and How Capitalism Saved America. His latest book is Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution — And What It Means for America Today.