The Case for Ben Bernanke as Mad Scientist

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The opportunity for Federal Reserve Chairman Ben Bernanke to stargaze in the clear skys of Jackson Hole, Wyoming and to bond with a horse whisperer has done Bernanke some good.

The speech he just delivered, in the land where Dick Cheney roams, was almost John Wayne like in its frankness. Perhaps, after his visit with the horse whisperer, he considers himself a cowboy. Whatever he may think of himself, though, clearly the label "mad scientist", with the emphasis on "mad" fits best.

Let us look at this Bernanke speech, delivered in the land where buffalo roam alongside Dick Cheney.

First, Bernanke gives himself, and his fellow government interventionists, a pat on the back for creating and sustaining an economy that continues to leave European governments on edge about their financial conditions. A concern that also holds true for many U.S. cities and states, indeed for the United States, itself. He pats himself on the back as high unemployment continues to linger,as home sales hit record lows and as business await news about what new regulations will suffocate the economy.

Some environment for a government employee to take a bow. But he did:

On the whole, when the eruption of the Panic of 2008 threatened the very foundations of the global economy, the world rose to the challenge, with a remarkable degree of international cooperation, despite very difficult conditions and compressed time frames. And when last we gathered here, there were strong indications that the sharp contraction of the global economy of late 2008 and early 2009 had ended. Most economies were growing again, and international trade was once again expanding.

Mad.

Bernanke then went on to show that he is an unabashed Keynesian:

For a sustained expansion to take hold, growth in private final demand — notably, consumer spending and business fixed investment — must ultimately take the lead.

Mad.

There was only very limited talk in Bernanke’s speech of savings (He only briefly mentions business fixed investment) driving an economy by producing more goods. In Bernanke’s Keynesian view it is all about consumption.

Focus a man on eating fish (consumption), instead of catching more and picking grapes and baking bread, and the man’s economy will never grow.

Bernanke then admits that he was surprised that savings are increasing:

Among the most notable results to emerge from the recent revision of the U.S. national income data is that, in recent quarters, household saving has been higher than we thought — averaging near 6 percent of disposable income rather than 4 percent, as the earlier data showed.

Mad.

Doesn’t Bernanke get that people throughout the land are scared out of their financial minds? That the demand for cash is soaring (Being picked up in the Fed data as additional savings) because people have no clue as to what is going to happen next in the economy? All he notices is the housing factor problem:

Household finances and attitudes also bear heavily on the housing market, which has generally remained depressed

He then admits that major corporations are also scared out of their wits and holding large amounts of cash:

Generally speaking, large firms in good financial condition can obtain credit easily and on favorable terms; moreover, many large firms are holding exceptionally large amounts of cash on their balance sheets.

He then admits that the employment situation is a disaster:

Incoming data on the labor market have remained disappointing. Private-sector employment has grown only sluggishly, the small decline in the unemployment rate is attributable more to reduced labor force participation than to job creation, and initial claims for unemployment insurance remain high.

He then confesses that the FOMC didn’t expect this second leg of the downturn:

Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year.

So what does Ben do at this point, right after dissing his earlier forecast? He makes another one:

I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace. Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place

Mad.

He does not explain how he has adjusted his forecast methods in making this forecast. Or is he using the faulty forecast methods that failed him earlier this year?

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©2010 Economic Policy Journal

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