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Dean Baker does not ♥ Ben Bernanke

Wednesday, December 09, 2009

Dean Baker writes in the Huffington Post that the current Fed chairman is no better than the last Fed chairman when it comes to spotting asset bubbles and, for that reason, maybe doesn't deserve to be reappointed.

As the Senate debates Federal Reserve Board Chairman Ben Bernanke's reappointment, it is striking how the media view blaming Mr. Bernanke for the Great Recession as being out of bounds. Of course Bernanke bears much of the blame for this economic collapse.

He was either in, or next to, the driver's seat for the last seven years. Bernanke was a member of the Board of Governors of the Federal Reserve Board since the summer of 2002. He served a six-month stint as head of President Bush's Council of Economic Advisors beginning in the summer of 2005 and then went back to chair the Fed in January of 2006.

This crisis is not a weather disaster like Hurricane Katrina; it is a manmade disaster that was brought about by seriously misguided economic policy. And, after Alan Greenspan, Bernanke was better positioned than any other person in the country to prevent this disaster.

The basic argument is very simple. The country had an enormous housing bubble. This bubble drove the economy ever since the last recession in 2001. It propelled the economy directly through a building boom that sent housing construction to record levels. Indirectly, it led to a consumption boom as people spent money based on the $8 trillion in housing equity that was temporarily created by the bubble.

When the bubble collapsed it was inevitable that it would lead to the sort of disaster that we are now seeing.
Yes, Baker is one of the astronomically small percentage of economists who have some sort of an odd physiological makeup - perhaps a misplaced gene somewhere - that allows them to actually see asset bubbles in real time. When you think about it, it's kind of unfair for him to be criticizing other dismal scientists who are not so blessed.

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5 comments:

Anonymous said...

Slightly OT, but it is part of a bolded sentence above:

While Hurricane Katrina was indeed a weather phenomenon, the disaster was as manmade as the current financial crisis.

The federal government through the Army Corps of Engineers is responsible for the failure of the levee system in New Orleans, as well as the destruction of the Mississippi Delta wetlands that historically protected the city from severe weather.

It is unfortunate that Dean Baker is repeating this untruth.

Anonymous said...

The central bank caused this crises with too much printing. Their theories make no sense.

Blissex said...

«Baker is one of the astronomically small percentage of economists who have some sort of an odd physiological makeup - perhaps a misplaced gene somewhere - that allows them to actually see asset bubbles in real time.»

I would guess that a lot of other economists did see it, but spoke of it in euphemistic terms or not all, because creating huge notional capital gains was government policy to redistribute income from those with less assets to those with more assets, a policy which was enthusiastically endorsed by most voters.

It is not coincidence that very similar bubbles have been increasingly happening regularly since 1985 or so (with a "hockey stick" starting in 1995), and in many countries where desperate baby boomers just want to MAKE MONEY FAST to enjoy a luxurious retirement via huge government engineered capital gains.

Blissex said...

«guess that a lot of other economists did see it, but spoke of it in euphemistic terms or not all»

Put another way: the majority of economists who are publicists are sell-side economists. There are buy-side economists, but they either don't go public or keep mum. Baker is a buy-side economist who also goes public because he is an idealist (most likely), or he has realized that he ha no chance anyhow to get the generous rewards awarded to the more useful sell-side economists.

Tim said...

I thought it was interesting that Baker bought a house over the summer after having sold his three or four years ago.

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