The Preoccupation

This is long – if you’re busy or bored, just skip to the last paragraph.

Bernanke’s speech covered central banking outlook given the ongoing financial meltdown, by way of a disturbingly self-congratulatory tone. The transcript is bereft of all but superficial insight into the role of “financial stability” in macroeconomic stability. In the talk,  Fed standard operating procedure (read: being monocularly obsessed with inflation), is updated in a superficial and reactionary way. To wit:

Central banks certainly did not ignore issues of financial stability in the decades before the recent crisis, but financial stability policy was often viewed as the junior partner to monetary policy. One of the most important legacies of the crisis will be the restoration of financial stability policy to co-equal status with monetary policy.

The transcript reveals:

• That when “financial excesses” that develop over longer periods of time “unwind,” this may also affect inflation! What Bernanke is saying is that when bad bankers torpedo their own banks with risky short-term decision-making and are eventually caught out (in the medium-term), this hurts the part of the economy he actually cares about (supply, output, inflation). Fun fact from the lecture: this connection is totally new to Bernanke and to the way central banks think about stability.
• Interest rates were so low going into the crisis that central banks had to freak out and purchase types of financial instruments they’d really prefer not to, in lieu of lowering interest rates further. Bernanke notes that in the future when interest rates don’t need to be so distressingly low, banks will likely never do that BS again. On the other hand, what the central banks *might* like to do is talk to markets about how to plan for interest rates. You heard right: through this fiasco, central banks have learned that they might like to let the market know what’s going to be going on with rates later on down the line. Apparently this helps people plan…you know, their lives and investments and stuff. All of this: new learnings. Fed is growing up, new learnings. Big boy talk.
• That in order to save the day, The Fed needed to lend to all kinds of institutions on all kinds of relaxed terms (crisis mode!). Interestingly, this entailed offering all kinds of sweet loans to non-banks. Good thinking.
• Ok so apparently this whole world economy thing is all tied together. Pumping money into the gut of Bank of America like so many rotting twinkies doesn’t help foreign institutions that may need hard currency (in this case Dollars and Euros). So The Fed is going to lend out to foreign banks too. These foreign banks will then have hard currency. The Fed looooves lending. There is no discussion of the medium or long-term ramifications of this scale of lending. Short-term: we’re golden, there are no problems, stop asking questions about future ramifications, Bernanke is trying to give a superficial lecture here.
• That those Fed people who are good at analyzing the inflation stuff fromt the last few decades may also be good at the “Holy WHOA – what in the WHAT are those banks doing, because that stuff may get us into *really serious trouble* later” stuff. Bernanke is realizing, for the first time, that analysts may be useful in analyzing. Maybe discovering obvious and pervasive impropriety and ultraleveraged risk.
• Analysts may now have oversight of potentially “important” nonbank entities. Meaning a corporation may not be a bank, but the corporation is still so large, that if it were to fail, it would take banks down as well. The best thing to do with a time-bomb is keep an eye on it. If you keep a time-bomb close at hand, you’re sure to know just what to do when it explodes. Diffusing time-bombs is difficult and messy and we’d rather not talk about it or really even allude to it in this lecture. There is nothing to see here. And if there is we have an eye on it.
• From the transcript: “The idea that policy is more effective when separate tools are dedicated to separate objectives is consistent with the principle known to economists as the Tinbergen rule.” Incidentally, this same rule may be more familiar to the rest of us as the holy-crap-they-have-a-named-rule-for-the-idea-of-using-different-tools-for-different-jobs rule. Once again, Bernanke is citing new concepts and new strategies here. I am sure the audience was rapt.
• That the monetary policy tools Bernanke and his forbears have been relying on exclusively for a few decades is so ineffectual during financial downturn, that it’s like picking up a puddle with chopsticks.

Today, Ben Bernanke visited the fed. The Herald writes:

Boston Fed chief Eric Rosengren and 26 other high-profile economists will join [Bernanke] to discuss the recession’s effect on Fed doctrine and practices.

A few members from the Financial/Governance Research Working Group wrote and chanted this today, in response to Bernanke’s visit:

There is a financial crisis in America. It has become apparent that the experts across the street [at The Fed] are ill-equipped to address the crises we are *still* in the midst of. And it is very apparent that they are not equipped to address any future crises that may further undermine our wellbeing as individuals and our stability as a domestic and world economy.

Ben Bernanke, The Fed, and other government agencies are guilty of the appearance of impropriety. There is a general outcry for transparency in Fed actions, in derivatives trading, in the entanglement between the bank holding companies who purport stability while engaging in  risky financial practices.

There are some sources who indicate that Bernanke’s role in the bailout was unethical. There is mounting evidence that the Fed and other government agencies were incompetent to handle even the basic actions  entailed by the bailout – that they did not understand the domestic and international implications of their missteps. Little has changed. Banks remain entangled, opaque, and opportunistic. Yet they maintain that an environment of freedom and status quo will preserve the stability of our economy.

Ben Beranke spoke at my commencement in 2006. His speech was long, poorly formulated, and irrelevant. The person in front of me and the person behind me fell asleep in their chairs. Today Ben Bernanke spoke with other high level economists. And today, as he was last year, and the year before that, and the year before *that*, Ben Bernanke is incompetent to handle the challenges posed by the mess he and his colleagues failed to see coming.  Bernanke continues to make himself and the institutions he represents irrelevant, by holding back on transparency in the financial industry and by unnecessarily obfuscating the content and intention behind his ongoing work – here in Boston today, all over the country this week, and all over the world, going forward.

What now? Now address the people Bernanke. I can’t speak for the group. But I do know that the Occupy movement is involved in a continuous program of education and ideation. Your system of keeping the people in the dark will not survive Occupy. Your practice of making convenient rules in back rooms with rich men for the short-term convenience of a privileged few is a house of cards. And we are turning the lights on.