By William K. Black

Greetings form Guayaquil, Ecuador where I’m teaching a mini-course at ESPOL.  The course introduces students to the great economic debates of theory that shaped our dominant fiscal, monetary, and anti-regulatory policies in the decades before the financial crisis.  Memory can be a tricky and misleading guide, so I went back to what the key decision makers and theorists were saying in the years before the crisis.  My focus is on Ben Bernanke and Alan Greenspan, but I also discuss extensively John Williamson, who coined the phrase “the Washington Consensus.”  (My readers know that I attribute many of the most damaging anti-regulatory policies to the Clinton-Gore administration and its evisceration of effective regulation through its “Reinventing Government” program.)  I wanted readers to see what was being said by the Fed’s leadership (which would soon transition from Greenspan to Bernanke) as the financial world was exploding into an orgy of “accounting control fraud” (the most destructive in history) that was hyper-inflating the largest financial bubble in history, and about to cause a global financial crisis that produced the Great Recession and (if Bernanke is to be believed) would have produced another Great Depression but for the largest financial bailout in history.

The short answer, which is the subject of this first installment in a series of articles arising from what I learned in preparing the mini-course, is that Bernanke was deliriously happy.  The course examines two of his talks at great length.

Remarks by Governor Ben S. Bernanke
At the meetings of the Eastern Economic Association, Washington, DC (February 20, 2004)

The Great Moderation

Remarks by Ben S. Bernanke
At the Stanford Institute for Economic Policy Research Economic Summit, Stanford, California (February 11, 2005)

Inflation in Latin America: A New Era?

Bernanke became a Fed Governor in 2002 and served until mid-2005 when Bush made his President of President’s Council of Economic Advisors.  Bush then made him Greenspan’s replacement in early 2006.  Bernanke, Greenspan, and the various Treasury Secretaries were the key decision-makers during the phase of Bush’s term (2003-mid 2007) when the financial and housing sectors became endemically fraudulent.  As my readers know from the discussion of the appraisers’ petition – those frauds were already severe by 1998, but the growth of “liar’s” loans (over 500% from 2003-2006) turned the fraud epidemics into a pandemic.

Bernanke’s talks on Latin America and “Great Moderation” reveal the reasons for his pride and the extent of that pride.  In both talks the heroes are conservative neoclassical monetary economists and their theories and policies.  Bernanke, of course, was a prominent member of that tribe.  The villains (heterodox economists from Latin America who proved influential for decades in the United Nation) were routed.  Their defeat was so total that the leftist President of Brazil, Lula, was (overwhelmingly) following the fiscal and monetary policies that Bernanke had long recommended.  The unconditional victory of Bernanke’s views was recognized throughout Latin America (except, he said, Venezuela).  The results, globally, were superb.

The “capital markets” (hedge funds) were providing vitally important and unambiguously (to Bernanke) constructive “discipline” to slacker nations and peoples and forcing them to give up their slacker ways.  The world was converging rapidly on a single set of policies premised on the Washington Consensus.  The focus was overwhelmingly on stopping inflation.  Bernanke described the alternative goal of reducing unemployment to 4% as overly optimistic.  The world was a harsh one – any effort to achieve full employment would trigger inflation and inflation was the great scourge that was defeated by modern central banks following modern macroeconomic theories and policies.  However, inflation lurks in the shadows and must be prevented by ever vigilant central bankers.  Fortunately, central bank independence was now the norm and the “new ideas” of modern macroeconomics were now embraced globally with a few notable exceptions.

The results were the “Great Moderation.”  Recessions occurred far less commonly and were much milder than in the past.  Hyper-inflation had been slain even in Latin America.  Interest rates were much lower, and Bernanke said that was unambiguously good for investment and growth.  Spreads between the interest rates on debt previously thought high risk relative to low risk debt had declined dramatically.  Bernanke thought that was unambiguously good.

Citicorp began writing its series of infamous odes to “plutonomy” in September 2005, but Bernanke lost no sleep over the U.S. descent into crony capitalism.  But Bernanke also failed so utterly to see the coming catastrophe in the U.S. or the significance of the rise of parties through much of Latin America enraged at the Washington Consensus.  Bernanke also had no explanation for why his triumph had not led to dramatic improvements in the U.S. middle class or working class.  He did not address the fact that the nation reporting (I caution that reports can be wrong, often deliberately wrong) by far the greatest surge in growth and power was China and while that surge assuredly has something to do with markets, no one would describe them as “free.”  Bernanke, enraptured by his triumphs, was clueless to all of the most important economic developments of his life that turned his triumphs to tin.