Economies: Bernanke's tenuous grip on reality

Ben Bernanke's biog ((at the Federal Reserve Bank - here) reveals something disturbing for someone in such a senior position. He's never had a proper job. He's never had the worries of the real world. He's never had the risk that his house will be repossessed because his industry has evaporated and he's never had to worry that his salary won't be paid.

He's been an academic and held a variety of advisory positions at the Fed until joining the Board of Governors in 2002. But he's never been employed in the private sector except as part time Editor of the American Economic Review.

Against that background, his comments to a senate committee question late last year that American homeowners worried about rising interest rates, stagnant incomes and inflation and the risk of foreclosures and having spent all of their savings should borrow against any equity that they may have in their homes to fund their living expenses was just old-fashioned claptrap about making assets sweat and cashflow being more important than balance sheets.

It was irresponsible and wrong - and characterises the Fed's thinking under Greenspan as well as under Bernanke's own stewardship.

Bernanke's problems is that he's got tunnel vision, and in his tunnel it never rains. His concepts of economics are those taught in A level economics in socialist-Britain in the 1970s. Controlling interest rates has not improved the recent situation, so Friedmanonics is broken.

Pouring public money into the economy, witness the USD600 cheques mailed out to millions of taxpayers just six months or so ago, has not worked either.

Promising to put USD700,000 million into the financial sector (but not actually doing so except to keep a few basket cases afloat) has not generated a turnaround.

Yesterday, again before the Committee, he wrote out another cheque, hoping it won't be cashed. USD700,000 isn't enough - as Treasury Secretary Paulson said yesterday, that was for investment and they hope it will cost the taxpayer nothing. The new proposal is broadly in line with the EU concepts - and that will combine investment with Treasury loans and Fed backed guarentees.

Then he suggested another "economic stimuls package" currently being examined by Congress would be a good thing.

That wasn't where Bernanke's flawed reasoning came into play - although his hope that promising to make funds available would translate into confidence so that he was not called on to come up with the money was palpable.

No. Where he has lost his grip on reality is in the old-established concept that consumers should spend their way out of a country's recession.

His comments, which were long and complex, are easily simplified:

1. The situation is desperate : the housing market and car markets are in desperate straits - largely because there is less credit around. There is high inflation.

2. "the declines in the prices of oil and other commodities will have favorable implications for the purchasing power of households."

3. an "economic stimulus package should be targeted "to help improve access to credit by consumers, homebuyers, businesses, and other borrowers." Not, notice, to help existing borrowers. In short, measures should create new borrowing.

4. "Such actions might be particularly effective at promoting economic growth and job creation," although what he should perhaps have said was "reducing economic decline and saving jobs." Aside from the positive spin, what this means is that, if Americans want to save their jobs, they had better get into the malls and start spending.

So here you have it.

The chairman of the most powerful central bank in the world is saying, simply, "This is not a government issue. If you want to save your jobs and your homes, then don't save any spare cash: go out, borrow even more money that your present record debt levels and buy stuff."

In other circumstances, President Putin of Russia's comments yesterday that Russia's experience in post-crisis management might prove valuable to the rest of the world would have been laughable. But, had it not been that as he spoke the Russian Central Bank was publishing plans to save 80 banks with a huge capital injection, it might have had some credibility.

Bernanke's testimony of 20 October 2008 is here

* Apologies to Rudyard Kipling. If