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Bernanke Expectations: New Fed Chairman, Same Old, Same Old

The disconnect between Bush regime deed and American public need grows: in Iraq, in New Orleans, on global warming and off-shore oil drilling, from Social Security to selecting Supreme Court Justices, the gulf widens. The choice of Dr. Benjamin S. Bernanke to succeed Alan Greenspan as Federal Reserve Board Chairman follows the pattern.

Just as the ship Economic sails into increasingly choppy waters, we will suffer a Princeton Professor famous for sublime confidence that all is well in the economy or, if slightly off-course, easily corrected. In this he looks like Alan Greenspan who managed similar confidence in the crazy stock market bubble of the 1990s (the US, he said then, had wondrously achieved “a new economy”). Greenspan caved to political pressures and waxed optimistic even in the face of policies he had earlier warned against. Similarly, Bernanke began major speeches in March and April of this year with the stunning line: “On most dimensions the U.S. economy appears to be performing well.” .

Like Greenspan, Bernanke is minimally distressed that US consumers have stopped saving and borrowed beyond anything ever seen before, that the debts owed by the government to foreign institutions and individuals breaks all records, that the balance of our trade with other countries shows unprecedented levels of deficit, and that the inequalities of wealth and income in the US have widened drastically across recent decades. Unlike the retiring Greenspan, who at least admits that a housing bubble now exists, Bernanke denies even that in his drive to reassure all who will still listen. Bernanke on the US economy replicates Bush, Cheney, and Rumsfeld on the US position in the world.

As the new Fed chairman, Bernanke, a professor of economics, should raise more than eyebrows. His is an academic discipline now extremely disconnected from most people. In the past, economics professors regularly focused on asking big, important questions about capitalist economies — why does cyclical instability plague them, why can’t they eradicate poverty, why are some capitalist nations rich and so many others poor, why does the full employment many demand elude them? They also, at least sometimes, faced up to even bigger questions: what are the relative benefits and costs of capitalism versus socialism and communism, and how do economic systems interact with politics and culture in shaping and changing social systems? Students who cared and wanted to make a better world took economics courses to get answers to such questions. But for the last forty years, economics professors turned away from the big questions and aimed instead to dazzle onlookers with their abstract mathematical methods focused on ever smaller questions. The economics professors wanted the prestige and financial rewards of their colleagues in the natural sciences and engineering departments. But while top physicists and biologists remained focused on the big issues — matter, energy, and life — and debated fundamentally alternative theories about them, most economists did not. They endlessly repeated celebrations of capitalist market efficiency expressed in ever greater mathematical and statistical details. The few dissenters too mostly stressed mathematical methods over substance, because method had come to matter far more that substance in economics.

The business community understood this and so turned increasingly away from economics to business schools. There, businesses found a kind of economics worth learning and practically useful. The general population lost interest in abstruse academic economics, while watching with growing disdain as economists said what politicians and big business paid them to say. What remained to the academic economists were three small audiences. The first audience was themselves: economics professors and their graduate students impressed one another with their technical methods, accordingly hired one another, and so further insulated themselves from the rest of the world. The second audience was larger but captive: undergraduates taught that the US economy was efficient, fair, and well controlled (by private property, markets, and maybe a little government intervention). The third audience was the nation’s political leaders (in business and government) who needed the veneer of “economic analysis” from expert advisors to cover their political decisions about taxes, government spending, economic regulation and the like. The relatively few who refused to serve these audiences in these ways found themselves either excluded from academic jobs or else given second-class teaching positions.

Bernanke is a product and enthusiastic booster of all that academic economics has become. His career is a paradigm case of serving the first and third of the audiences listed above. His technical economics won the profession’s rewards and by successfully pandering to conservative politicians he has been appointed chief economic cheer leader. His Princeton resume lists many “honors and fellowships” not one of which has anything to do with teaching students. As survivors of most economics courses can readily attest, economics teaching is generally awful.

Yet the Fed has concrete tasks to perform. In addition to controlling the money supply, these tasks include managing (1) the price level of US goods and services (i.e. preventing inflations and deflations), (2) the exchange rate between dollars and other world currencies, (3) interest rates, and (4) international capital flows. The Fed comes under intense and contradictory pressures on all these tasks. Corporations — the biggest, richest, and most powerful “interest groups” — push in contradictory directions. Some want inflation, others seek deflation; some demand higher interest rates, others want them lower, and so on. Bernanke has, in effect, promised to negotiate these pressures much as Greenspan did. That means he will go with the preponderance of pressures, subject to the control of the Bush Republicans who put him in place (so long as they stay in control).

Thus we can expect loud commitments to prevent inflation. Bernanke will likely continue Greenspan’s use of recent strategic changes in government statistics on prices (like shifting among “consumer price indexes,” “core indexes,” “personal consumption expenditure” indexes or endlessly increasing the number of “seasonal adjustments” to price statistics). Here the point will be to make numbers say what is most convenient for Fed policies. So too Bernanke will raise interest rates “to combat inflation” except, as with Greenspan, when financial bubbles burst and interest rates need to be dropped fast to contain the disaster. We can likewise expect Bernanke assertions about maintaining the value of the dollar except when dangerous US trade imbalances produce enough pressures to “force” us to devalue the dollar.

In short, Bernanke will manage the money supply in the “interests of the US economy” — the preferred euphemism for accommodating the prevailing business pressures — at an extremely precarious, unstable, and dangerous point in America’s history. The mess left behind by Greenspan is now Bernanke’s. The mandate is the same, the problem greater. The Greenspan Fed generated, denied, spun, and surfed the waves created by a series of bubbles by which illusions of prosperity were maintained. Bernanke will do likewise, but it’s harder now.

Nothing illustrates this better than those 2005 speeches (referred to above) where he invented the convenient “global savings glut” theory. Bernanke uses it to absolve top policy-makers (Greenspan and Bush) of responsibility for the current world situation in which money desperately needed around the world for economic development is instead loaned to a debt-gorged and earnings-short US economy. These days, Americans buy more from the world (imports) than we sell to them (exports). Since revenues from exports fall short of the costs of the imports, the difference is generated by borrowing from abroad. Likewise, because Bush wages expensive wars while cutting taxes (on the corporations and wealthy households that finance his campaigns), the government runs a deficit. To spend more than it receives in taxes, the government borrows from abroad. Hence, the largest US net debt to the rest of the world in history — now in the scary neighborhood of $2.5 trillion. This huge debt jeopardizes the US dollar as foreigners worry lest its economic problems render the US ever less able to pay them back.

But Bernanke dismisses such accounts of the current world economic mess. Instead, he turns the story around. The problem lies with foreigners — a move as convenient as blaming the “insurgents” for the disaster in Iraq. The “foreigners” have saved money but don’t “want” to lend or invest it in their own countries. Instead, they choose to lend this “glut of savings” to America. It’s their fault. Bernanke’s “foreigners” nicely lumps together corporations, governments, and people as if they were one undifferentiated mass, a common move of professors avoiding anything like a class analysis of economies and their interactions. Bernanke scolds them for hurting their own countries. Nice. He concludes by painting his policy goals as helping others to do better for their own countries by keeping their savings there. Such thin sleights of hand were the hallmark of Greenspan’s tenure. Bernanke strives to do as well.

[Max Fraad-Wolff assisted in preparing this article.]


Rick Wolff Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002).


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