The Clueless Captain of the Economy (And fear for what is ahead)

The Center for Economic Policy Research has put together the below list of Ben Bernanke's observations on the economy, during his period as Fed chairman. It is clear that nowhere along the way did he see the financial crisis that was in front of him.

Indeed, by the summer of 2008, it was obvious that the economy was headed for a major crisis (See here, here, here, here, here, here, here and here.) Yet, Bernanke gave no indication that he understood his erratic monetary policy was about to cause the greatest financial and economic crisis since the Great Depression.

Most alarming about this situation is that clueless Bernanke has since then introduced new "tools" by which to manage monetary policy. I contend that here barely understands these tools, that they could blow up in his face at any time and cause great harm to the economy. We are on the edge between a great inflation and another great collapse and the man at the controls doesn't appear to see it coming, just like the last time.

Here's the last time:

10/1/00 – Article published in Foreign Policy Magazine

A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily.

7/1/05 – Interview on CNBC

INTERVIEWER: Ben, there's been a lot of talk about a housing bubble, particularly, you know [inaudible] from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?

BERNANKE: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.

7/1/05 – Interview on CNBC

INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.

10/20/05 – Testimony before the Joint Economic Committee, Congress

House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.

11/15/05 – Confirmation Hearing before Senate Banking Committee

SEN. SARBANES: Warren Buffet has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?

BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable… With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well-managed and do not create excessive risk in their institutions.

3/6/07 – At bankers’ conference in Honolulu, Hawaii… as delinquencies in the subprime mortgage sector rise

The credit risks associated with an affordable-housing portfolio need not be any greater than mortgage portfolios generally.

3/28/07 – Testimony before the Joint Economic Committee, Congress

Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear…At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

5/17/07 – Remarks before the Federal Reserve Board of Chicago

...we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.

8/31/07 – Remarks at the Fed Economic Symposium in Jackson Hole

It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.

1/10/08 – Response to a Question after Speech in Washington, D.C.

The Federal Reserve is not currently forecasting a recession.

2/27/08 – Testimony before the Senate Banking Committee

I expect there will be some failures [among smaller regional banks]… Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.

4/2/08 – New York Times article after the collapse of Bear Stearns

“In separate comments, Mr. Bernanke went further than he had in the past, suggesting that the Fed would remain aggressive and vigilant to prevent a repetition of a collapse like that of Bear Stearns, though he said he saw no such problems on the horizon.”

6/10/08 – Remarks before a bankers’ conference in Chatham, Massachusetts

The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.

7/16/08 – Testimony before House Financial Services Committee

[Fannie Mae and Freddie Mac are] adequately capitalized. They are in no danger of failing… [However,] the weakness in market confidence is having real effects as their stock prices fall, and it’s difficult for them to raise capital.