Posts tagged with: Ben Bernanke

bratI had a chance to talk with Michelle Boorstein yesterday about David Brat and a bit of his work that I’ve been able to become familiar with over the past few days. She included some of my comments in this piece for the Washington Post, “David Brat’s victory is part of broader rise of religion in economics.”

I stressed that Brat’s research program, which in many ways emphasizes the relationship between Christianity and capitalism, has at least two basic features. First, he’s focused on increasing theological awareness of economic realities: “I never saw a supply and demand curve in seminary. I should have.” This kind of increased economic sensibility would help the church to be a positive factor for social cultural change: “The church needs to regain its voice and offer up a coherent social vision of justice and rationality.”

But on the other hand, Brat has a message for economists as well. He challenges the mainstream assumption of economics as merely a positive, value-free science that can provide objective answers to questions without the trappings of morality or religion. A comment on Boorstein’s piece illustrates this important aspect of Brat’s work:

Dave helped me understand the essentiality of the links between capitalism (voluntary exchange that serves both parties’ interests) and theology (man’s obligation to serve God through work and use gain to carry out Jesus’ admonition to help the poor). At first, I thought he was joking. Surely one did not have to embrace a theological perspective to be a good capitalist. But he was not joking. I now have a much more nuanced and mature understanding of the “moral foundations of capitalism” than I did before I met Dave.

Brat’s faculty page includes portraits of John Calvin, Adam Smith, Friedrich Hayek, and John Maynard Keynes. Obviously there’s a lot to David Brat and I look forward to becoming more familiar with him and his work.

Amid all of the bad reportage out there on Brat, and there is so much that it is hard to keep up, here are a few other pieces that I have found to be helpful:

This week’s reappointment vote for Fed Chairman Ben Bernanke has created some strange bedfellows in Washington. A muddled middle of Republicans and Democrats supports the Keynesian’s reappointment, but the real odd couples are among the opposition. For different if overlapping reasons, free market proponents and far-left figures such as democratic-socialist Bernie Sanders of Vermont are both convinced that Bernanke has done much to hurt our economy, particularly those in the bottom half of our economy.

Desmond Lachman of The Enterprise Blog observes:

Throughout 2006, when the worst of the sub-prime lending was taking place, Bernanke was conspicuously silent in sounding the alarm about the dangers of the U.S. housing bubble. Similarly, he was painfully slow in recognizing how severe the fallout from the bursting of the housing bubble would be….

If there is one more item that should sink Bernanke’s bid for a second term it has to be his recent statement that the Federal Reserve’s extraordinarily low interest rate policy between 2001 and 2004 contributed little to the creation of the largest U.S. housing market bubble on record. The Senate would do well to ask itself whether the economy’s interests would be best served by again choosing a Fed chairman who seems to have learned so very little from the Federal Reserve’s past monumental mistakes.

A sign that Bernanke’s reappointment really may be doomed: John McCain, whom many would characterize as a member of the muddled middle, also has come out against Bernanke. Political calculations may lead others to follow. For instance, if the new senator from Massachusetts, Scott Brown, wants to reinforce his strong crossover appeal, opposition to Bernanke offers an uncommon opportunity: Both working class Democrats and limited government conservatives reject Bernanke’s vision of Uncle Sam playing wet nurse to Wall Street.

As I wrote recently, our economy would be best served by a Fed Chairman who will let the market of lenders and borrowers guide interest rates, and who understands that unproductive companies should be allowed to go bankrupt. What’s useful in those companies doesn’t disappear in a bankruptcy. The valuable assets are purchased and put to better use by more productive companies. And when interest rates are allowed to float upward to reflect the scarcity of current savings, people will be more careful what they borrow for, while others will be enticed to save more, attracted by the higher interest rates paid for bonds. This, in turn, will boost available capital for longer-term business ventures aimed at enhancing our productivity.

Consider the short depression of 1920. A decade before the Great Depression, World War I had just ended and a flood of American soldiers returned home in search of work. Meanwhile, the Federal Reserve, having roughly doubled the money supply during the war, now put the brakes on the easy money by moving interest rates closer to where they might sit if simply left to market forces. The government also largely refrained from bailing out failed businesses or trying to juice the economy with big stimulus packages.

All of this is the opposite of what the Keynesians recommend in an economic slowdown. It’s the opposite of the Keynesian strategy pursued by both FDR and Hoover during the Great Depression. And it’s the opposite of what Chairman Bernanke has sought to do.

So how did the depression of 1920 play out? The readjustment to a peacetime economy was severe. Production fell by some 20%. Unemployment shot past 11%. But then the depression quickly reversed itself.

Many companies had gone broke, but their useful assets were sold to well-run companies. During the early phase of the contraction, goods and savings were tight, but the higher interest rates signaled to people, “Hey, if you want to borrow money, you’d better have a good, productive use for the money because you’re going to have pay a premium for it” — not because of a bunch of mean old capitalists but because there wasn’t a lot of savings to loan out right then. People got the message. Money got loaned to the most productive enterprises, and before long, the economy was humming again. The unemployment rate dropped below 7% in 1922, and below 3% in 1923. The government allowed the free market to readjust itself, and it quickly did.

This is the strategy recommended by the Austrian school of economics (which incidentally has more adherents in the United States than in Austria). The Austrian school is the polar opposite of the Keynesian school. The Austrian school predicted the Great Depression when others were preaching permanent prosperity. And it predicted our current recession when Bernanke the Keynesian was saying everything was right as rain.

All of this should give the Senate pause.

Blog author: jwitt
posted by on Monday, December 7, 2009

My essay in today’s American Spectator Online looks at why Ben Bernanke should not be confirmed to a second term as Chairman of the Federal Reserve:

Two planks in Bernanke’s recovery strategy: Expand the money supply like a banana republic dictator and throw sackfuls of cash at failed companies with a proven track record of mismanaging their assets. The justification? According to the late John Maynard Keynes, this is supposed to restore the “animal spirits” of the cowed consumer, the benighted creature who foolishly imagines that after a period of prodigality and mismanagement, maybe a country should rediscover its inner Dave Ramsey.

The full essay is here.