For a brief moment this past week, the American public glanced away from the economy’s unprecedented run of volatility and took pleasure from the insight that the biggest news story actually involved continuity.
In other words, a lack of change was the big story this week. But what exactly was this story? Were the New York Yankees winning yet again? Or was there yet another ghastly rumor in the Michael Jackson case?
Well, yes … and yes. The Yankees and the Jackson case just keep chugging along. But those stories of continuity don’t impact our economy, at least not in any dramatic manner. The reappointment of Ben Bernanke as Chairman of the Federal Reserve Bank of the United States, though, created quite a stir.
In retrospect, the buzz surrounding Ben’s reappointment should not have surprised any one; after all, the existence of an American national bank has itself been a controversial news story for decades, even centuries. Initially proposed by Alexander Hamilton to pay off the fledgling nation’s Revolutionary War debt, the short lived First Bank of the United States was dissolved soon after achieving this goal in 1811.
Just one year later, though, America entered the War of 1812 and began incurring a brand new pile of war debt. The Second Bank of the United States was then established to pay it off yet again; then, after achieving this goal, President Andrew Jackson dissolved the Second Bank during the 1830s. And after banking titan J.P. Morgan played a huge role in stabilizing the American financial system during the Great Panic of 1907, Congress decided to (finally!) create a permanent Federal Reserve Bank in 1913.
We’ve lived with this modern “Fed” ever since 1913. Nevertheless, why have Americans historically felt such ambivalence about creating a permanent national bank? Apparently, certain conservative politicians and citizens have always regarded national banks as socialist threats to capitalism and liberty. In fact, many of the arguments being made today against national health care echo the arguments made throughout history against national banks.
A Long Shot
At one time, the continued existence of any national bank seemed like a long shot; similarly, Bernanke’s reappointment at the Fed recently seemed like a long shot as well. Ben was, after all, first appointed by President Bush; President Obama was strongly rumored to favor chief economic advisor Larry Summers instead.
But Bernanke aggressively flooded the American economy with capital and slashed interest rates during the economic meltdown of 2008, decisions that pleased the Obama administration. His explanation? According to Bernanke, “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.”
A laudable sentiment, without doubt. But there are actually two distinct approaches to avoid presiding over a depression: one is to prevent its occurrence entirely, and the other is to delay it until someone else assumes command. Perhaps Obama reappointed Bernanke in order to eliminate any possibility that Ben was selecting the latter option!
Bernanke, of course, is not the first Federal Reserve Chair to resort to boosting liquidity during times of economic crisis. His predecessor, Alan Greenspan, did so time and time again in response to market declines, a currency crisis, a terrorist attack, and various other incidents during his long tenure. In fact, Greenspan’s actions appeared to preserve the longest run of economic prosperity in modern American history. So who could argue with his track record?
Well, Alan himself could … and in fact has done so. He went on the record to acknowledge that his actions might have contributed to the inflation of economic bubbles that “popped” after he retired from office, though he has also defended himself against his harshest critics. By flooding markets with investment capital, Greenspan asserts that he ensured the continued flow of healthy economic activity during his tenure. Nevertheless, he also agrees that he may have enabled the stock market, real estate, and other dysfunctional bubbles to flourish as well.
Time will tell whether Bernanke’s strategy will lead to a similar fate. There is, sadly, a distinct possibility that today’s tentative “green shoots” of economic recovery are actually only temporary bubbles that may eventually collapse into the throes of a “double dip” recession.
The Nature of Risk
A double dip recession is a depressing prediction, isn’t it? But it isn’t an inevitable one; after all, many different unique factors contributed to the collapse of the world’s markets in 2008. For instance, oil soared to $147 per barrel. The Afghani and Iraqi wars drained America’s wealth. And global warming appeared to reach a tipping point, sparking hurricanes, tsunamis, droughts, and other catastrophically costly natural events.
Greenspan and Bernanke argue that the likelihood of a second Great Depression would have been much higher if not for their actions. But if they only succeeded in delaying (as opposed to preventing) future economic collapses, then the costs of their decisions may prove to have exceeded their benefits. In other words, all of their efforts may have gone (or may yet go) for naught.
The nature of risk is a function of balancing the possibility that crises may occur against their potential effects if they cannot be avoided. With this in mind, only time will tell whether Bernanke and Greenspan truly eliminated the possibility of a Second Great Depression, or instead simply delayed it. Given Obama’s reappointment decision, though, we may still have Ben around to thank – or blame – when we learn the answer to that fateful question.