Bernanke and “The Great Moderation” Four Years Later

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In 2003-2004 the U.S. economy seemed to many to have recovered quickly and miraculously from the 2000 stock market crash and the 2001 recession.  There were those then, however, who argued that this was not a genuine recovery of accumulation, and that the fast rebound was due to the advent of a massive housing bubble, which was destined to burst in the end.  Thus Monthly Review‘s editors (John Bellamy Foster, Harry Magdoff, and Robert W. McChesney) wrote in “What Recovery?” in April 2003:

The great irony . . . is that the U.S. economy is being propelled forward in the present weak recovery largely by growth in personal consumption, even as real wages are declining.  The main factor holding up consumption is borrowing on the basis of increased home values — or a housing bubble. . . .  The housing bubble may be stretched about as thin as it can go without bursting. . . .  Even without a decrease in housing prices, there are indications that people have stretched their credit so far that expansion of consumer demand may not be able to continue at the same pace. . . .  The dependence of the economy on bubbles in housing and consumer spending becomes more alarming when it is recognized that the other sources of demand are faltering.  The real locomotive of a capitalist economy is capital accumulation or investment.  Yet, business fixed investment in the United States declined at an annual rate of 3 percent in the first three quarters of 2002.

Needless to say orthodox economists generally approached such contradictions with eyes wide shut.  Instead they insisted (not for the first time) that their brand of economics had effectively squelched the capitalist business cycle.  University of Chicago economist Robert Lucas (winner of the Bank of Sweden’s Nobel Memorial Prize in economics) declared in his 2003 presidential address to the American Economic Association that depression economics was a thing of the past.  The “central problem of depression-prevention” had “been solved, for all practical purposes.”  More significantly, Princeton economist Ben Bernanke, then a Federal Reserve Board Governor, presented a major address to the Eastern Economic Association on February 20, 2004, entitled “The Great Moderation,” in which he argued that monetary policy had grown so sophisticated that it was able to eliminate volatility in the economy.  Due to the advance of monetary technique, he claimed, “recessions have become less frequent and less severe.”  (John Kenneth Galbraith, in the title of his final book, called such illusions The Economics of Innocent Fraud.)

Bernanke, who was to be appointed head of Bush’s Council of Economic Advisers in 2005 and then chairman of the Federal Reserve Board in 2006, continually questioned the existence of a housing bubble, and argued that the “fundamentals” of the economy were sound (see John Bellamy Foster and Fred Magdoff, “Financial Implosion and Stagnation,” Monthly Review, December 2008).  A recognized authority on the Great Depression, in which he followed the lead of Milton Friedman, Bernanke asserted that those fears were now gone for good, and that even the stagflation troubles of the 1970s had been bypassed.  The new debate in macroeconomics for years to come, he contended, would no longer be about the sources of the Great Depression, or even of the stagflation crisis of the 70s.  Instead it would focus on “the sources of the Great Moderation.”  To be sure Japan was just then emerging from a decade of stagnation following a financial crash.  But for Bernanke this was not an indication of the increasing contradictions of capitalism, but simply pointed to the fact that some central banks managed money better than others.

The Great Financial CrisisToday we are in the midst of what has been called the “Great Financial Crisis” (see John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causes and Consequences, Monthly Review Press, January 2009).  Bernanke’s “Great Moderation” — or “the substantial decline in macroeconomic volatility over the past twenty years” — looks not like the “striking economic development,” which he called it four years ago, but merely the calm before the storm.  Even then his U.S-centric triumphalism dismissed the economic disaster that had devastated Argentina, Mexico, and Indonesia, as well as the newly capitalist former-Soviet Union states, in the twenty years of “moderation” prior to 2004, as if this had happened to non-humans.  No mention was made of the fact that U.S. economic stability had been achieved in part through the looting of the resources, both natural and financial, of those and other countries.

The Committee to Save the WorldIronically, the set of neoliberal policies that Bernanke was then celebrating as the source of the “Great Moderation” — promoted by the triumvirate of Greenspan, Rubin, and Summers (dubbed by Time magazine, February 15, 1999, “the committee to save the world”) — only served to make the crisis, when it finally hit, far more severe.  With “Great Moderation” Bernanke heading the Fed, and “Let Them Eat Pollution” Summers now back again in power beside President-elect Obama, it is difficult not to expect the worst.  Indeed, the current “see no evil, hear no evil, speak no evil” attitude toward capitalism that Bernanke and Summers above all epitomize will only serve to compound the crisis, with disastrous effects for billions of people around the world.

John Bellamy Foster is editor of Monthly Review and professor of sociology at the University of Oregon.