Yesterday President Obama officially announced that he would nominate Ben Bernanke for a second term as the Chairman of The Federal Reserve.
“Ben Bernanke has led the Fed through the one of the worst financial crises that this nation and this world have ever faced,” Obama said from Martha’s Vineyard, Mass., as Bernanke stood by his side. “As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another.”
In our opinion the President has done exactly the right thing. Bernanke has been attacked by both the right and the left, but the truth is that he and the other Fed governors deserve the lion’s share of the credit for avoiding what could have been the second Great Depression.
People on the right have attacked him for being too loose with monetary policy and leading us down the road to potential hyper-inflation. Their argument is understandable, as loose monetary policy played a significant role in inflating the housing bubble that put us here in the first place. But this does not change the fact that Bernanke was not dealing with normal times and he was not easing monetary policy during a time of growth as his predecessor had done. Bernanke was dealing with a crisis, and he took bold and aggressive measures to battle that crisis – ranging from lowering interest rates to nearly zero percent to buying treasuries to keep longer-term rates down, and from backing the banks to buying mortgage-backed securities. The list goes on. Those bold moves are the reason our economy has leveled off and perhaps begun to grow again.
We hear from the mass media and those on the political left that the stimulus is what has saved us – Congress passed the stimulus, and a few months later the economy shows signs of improving. Sounds logical, right? Yes, except for one small detail: more than 80% of the stimulus has not yet been spent. Moreover, the amount that has been spent is being overstated. For example, one of our clients is a government agency that has received their stimulus money, so the federal government counts that money as “spent,” but the agency has not spent it yet – it is sitting in their bank instead of in the US Treasury. Hardly stimulating.
The fact is that fiscal stimulus has never worked. It didn’t work for FDR during the Great Depression, it didn’t work for Germany after WWII, and it didn’t work for Japan in the 1990s. There are two schools of thought on why this is. To simplify them, there is the “it has never worked because it doesn’t work” school, and the “it has never worked because they have always done something wrong” school – not spent enough, spent it on the wrong things, etc. This latter school, proffered most notably by Paul Krugman of the The New York Times, boldly stated at the time that the size of the entire stimulus was too small to work. Now the same people claim that the meager amount that has been spent deserves credit for what rebound we have seen. When contrasted, that argument is so absurd that it is hard to say it out loud and keep a straight face. But, Krugman and company have never been ones to let things like facts get in the way of their theories.
Is Bernanke perfect? No. Has he made mistakes? Yes. But, Ben Bernanke saved us from the second Great Depression by acting aggressively and boldly while withstanding a great deal of criticism. If inflation does rear its head, we will need such a man to beat it. The President was right to nominate him for a second term.
Chuck Osborne, CFA
Managing Director
