Ben Bernanke’s new memoir, The Courage to Act, begins straightaway with a false premise. The first sentence of the book reads: “In all crises, there are those who act and those who fear to act.” The statement presupposes that action must always be good, and inaction must always be the result of fear.
Not all action is created equal, and action applied without knowledge can often make a bad situation worse. Throughout the book, Bernanke acts as if an economic contraction is analogous to a building on fire; someone has to put it out fast, or the whole thing will burn down. In fact, economic corrections are more akin to the common cold. You can try to blast a cold with antibiotics and repeated trips to the doctor, but you’re more likely to exacerbate the illness than do any good; usually a couple of days of bed rest are all you need.
From this inauspicious beginning, the book delves deeply into the history of the financial crisis and the Federal Reserve’s response. In the sense that it is a history book, it certainly has its merits, but as a work of monetary policy and economic analysis The Courage to Actleaves much to be desired.
Bernanke doesn’t hide the fact that he was taken totally off guard by the housing crisis, and even now he seems to have only a fuzzy understanding of why it occurred. He doesn’t make a clear connection between rising housing prices, and the incentives put in place by government regulators. He is quick to blame risky lending practices, but doesn’t seem to grasp why bankers were driven to that behavior in the first place. Rather than diagnose the cause, he prefers to treat the symptom by regulating undesirable behavior, without stopping to consider the incentive effects of such regulations. An economist who doesn’t understand incentives is a dangerous thing.
Investors and entrepreneurs miscalculate all the time, and are rewarded for their poor judgement with economic losses. But the Keynesians have no explanation for why this should happen systematically across an entire economy. (“Animal spirits” as Keynes famously put it, amounts to explaining a phenomenon by claiming there is no explanation.) Apart from some exogenous shock like a natural disaster or a war, economy-wide failures are always the result of bad incentives created by government. By encouraging people to buy houses when they couldn’t afford them, and mandating that banks lend to people with no way of paying back the loans, government planted the seeds of the housing crisis, whose ruinous fruit should have been obvious to anyone paying attention.
Bernanke’s fascination with the Great Depression should have helped him learn the lessons of interventionism. Rarely has the government intervened more heavily in the economy than during the futile attempts of FDR and Hoover to regulate their way to prosperity. Conveniently omitted is the fact that the economy had suffered steep crashes before, such as in 1920 and the panic of 1819, but the government’s inaction and willingness to let the market correct itself ensured that these would be so short-lived as to be almost forgotten by history.
Throughout the book, Bernanke takes pains to clarify that he is no ideologue. He repeatedly stresses that he is “neither pro-regulation nor anti-regulation,” “a moderate,” trusting in markets but sympathetic to interventionism. By reflexively denouncing both the laissez faire right and the socialist left as extreme in their views, Bernanke falls prey to the fallacy of the middle, the belief that a viewpoint must be reasonable simply because it falls between two polar opposites. Political agnosticism may have its virtues for a journalist or commentator, but for a man in Bernanke’s position it can indicate someone who doesn’t know the difference between good policy and bad.
That this is a problem is evident in the contradictory way Bernanke discusses TARP, the Troubled Asset Relief Program through which the Federal Reserve purchased subprime mortgage securities at higher than market prices. While acknowledging that these securities were grossly overpriced, Bernanke proposed paying more for them, in order to mitigate firms’ losses and encourage stability. But if prices had been pumped up to artificial highs, leading to the housing crisis, shouldn’t that situation have been corrected as quickly as possible?
Instead, TARP reinflated prices of the very assets that caused the problem in the first place. Since this was done with taxpayer money, it means money was taken out of the economy, where it would have been used by consumers and investors to satisfy their individual preferences, and instead used to pay artificially high prices for goods no one wanted. Only behind the veil of blind worship of government power can such actions seem economically healthy.
Bernanke repeatedly acknowledges the tension between doing the right thing and doing “what was necessary to save the system.” He expresses no fondness for AIG and its golden parachutes, but insists that a bailout was necessary to protect the economy as a whole. What he doesn’t realize is that in perpetuating that system he is just continuing the cycle of bubbles and crashes. Would a collapse of AIG and Bear Stearns have been painful? Absolutely. But the alternative will ultimately result in much more pain in the long run, as we are forced to undergo the same crises again and again, with prolonged periods of stagnation in between.
As the book progresses and the economic crisis continues, year after year, Bernanke responds by simply continues calling for more of the same, oblivious to the fact that his policies have thus far failed to work. Beginning with his argument that the Fed was “too passive” during the Great Depression, he always views the problem as one of the government not having done enough.
The $787 billion stimulus package of 2008 was regarded as not enough; TARP was not enough; three rounds of quantitative easing were still not enough. No matter what extraordinary actions the Federal Reserve took, according to Bernanke, it was never enough. The problem is, there’s no way to test these assertions. There’s no counterfactual of what would have happened if government had done less or more, despite what wonks with sophisticated econometric models want to believe. Economics, if it is to be at all useful, has to be based in solid theory that doesn’t depend on impossible empirics
Unintended though it may be, there’s a profound sadness about The Courage to Act. The arrogance of its title aside, it’s ultimately a chronicle of a man in over his head. It’s reasonable to assume that Bernanke was sincerely trying to do what he thought was right, but without a clear understanding of the root causes of recessions, he could only feel his way in the dark through the crisis. Spoon-fed the doctrines of Keynesianism and the worst monetarist tendencies of Milton Friedman throughout his entire education, the poor man never had a chance.