L.A. Liberty

A Libertarian in Leftywood

Anti-Bernanke →

In [his] opening lecture [on “The Federal Reserve and the Financial Crisis,”] Bernanke offers a brief overview of the role of central banks, their general origins, the specific origins of the Federal Reserve System, and the Fed’s early performance. …

So like any central banker, and unlike better academic economists, Bernanke consistently portrays inflation, business cycles, financial crises, and asset price “bubbles” as things that happen because…well, the point is that there is generally no “because.” These things just happen; central banks, on the other hand, exist to prevent them from happening, or to “mitigate” them once they happen, or perhaps (as in the case of “bubbles”) to simply tolerate them, because they can’t do any better than that. That central banks’ own policies might actually cause inflation, or contribute to the business cycle, or trigger crises, or blow-up asset bubbles—these are possibilities to which every economist worth his or her salt attaches some importance, if not overwhelming importance. But they are also possibilities that every true-blue central banker avoids like so many landmines. …

In describing the historical origins of central banking, for instance, Bernanke makes no mention at all of the fiscal purpose of all of the earliest central banks—that is, of the fact that they were set up, not to combat inflation or crises or cycles but to provide financial relief to their sponsoring governments in return for monopoly privileges. …

By ignoring the true origins of early central banks, and of the Bank of England in particular, and simply asserting that the (immaculately conceived) Bank gradually figured-out its “true” purpose, especially by discovering that it could save the British economy now and then by serving as a Lender of Last Resort, Bernanke is able to overlook the important possibility that central banks’ monopoly privileges—and their monopoly of paper currency especially—may have been a contributing cause of 19th-century financial instability. …

Besides ignoring the destabilizing effects of central banking—or of any system based on a currency monopoly—Bernanke carefully avoids any mention of the destabilizing effects of other sorts of misguided financial regulation. He thus attributes the greater frequency of banking crises in the post-Civil War U.S. than in England solely to the lack of a central bank in the former country, making one wish that some clever GWU student had interrupted him to observe that Canada and Scotland, despite also lacking central banks, each had far fewer crises than either the U.S. or England. Hearing Bernanke you would never guess that U.S. banks were generally denied the ability to branch, or that state chartered banks were prevented by a prohibitive federal tax from issuing their own notes, or that National banks found it increasingly difficult to issue their own notes owing to the high cost of government securities required (originally for fiscal reasons) as backing for their notes. Certainly you would not realize that economic historians have long recognized (see, for starters, here and here) how these regulations played a crucial part in pre-Fed U.S. financial instability. No: you would be left to assume that U.S. crises just…happened, or rather, that they happened “because” there was no central bank around to put a stop to them.

To be fair, Bernanke does eventually get ‘round to offering a theory of crises. The theory is the one according to which a rumor spreads to the effect that some bank or banks may be in trouble, which is supposedly enough to trigger a “contagion” of fear that has everyone scrambling for their dough. Bernanke refers listeners to Frank Capra’s movie “It’s a Wonderful Life,” as though it offered some sort of ground for taking the theory seriously… 

Bernanke’s discussion of the gold standard is perhaps the low point of a generally poor performance, consisting of little more than the usual catalog of anti-gold clichés…

It’s true that Bernanke’s whitewashing of the Fed isn’t quite complete: he devotes considerable time to explaining how it “blew it” during the Great Depression. But the admission is intended to be anything but fatal to the case for central banking. On the contrary: the depression was a crucial learning experience. Since then, the Fed, we are assured, has gotten its act together. Well, O.K.: there are still be a few bugs to be worked out. But never mind: some future Fed Chairman will manage to spin them away.

Notes:

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