The story of the year was a weak economy that could have been much, much weaker. Thank the man who runs the Federal Reserve, our mild-mannered economic overlord
I wish I were joking, but here's more from Time:
The overriding story of 2009 was the economy -- the lousiness of it, and the fact that it wasn't far lousier. It was a year of escalating layoffs, bankruptcies and foreclosures, the "new frugality" and the "new normal." It was also a year of green shoots, a rebounding Dow and a fragile sense that the worst is over. Even the big political stories of 2009 -- the struggles of the Democrats; the tea-party takeover of the Republicans; the stimulus; the deficit; GM and Chrysler; the backlash over bailouts and bonuses; the furious debates over health care, energy and financial regulation; the constant drumbeat of jobs, jobs, jobs -- were, at heart, stories about the economy. And it's Bernanke's economy.
In 2009, Bernanke hurled unprecedented amounts of money into the banking system in unprecedented ways, while starting to lay the groundwork for the Fed's eventual return to normality. He helped oversee the financial stress tests that finally calmed the markets, while launching a groundbreaking public relations campaign to demystify the Fed. Now that Obama has decided to keep him in his job, he has become a lightning rod in an intense national debate over the Fed as it approaches its second century.
But the main reason Ben Shalom Bernanke is TIME's Person of the Year for 2009 is that he is the most important player guiding the world's most important economy. His creative leadership helped ensure that 2009 was a period of weak recovery rather than catastrophic depression, and he still wields unrivaled power over our money, our jobs, our savings and our national future. The decisions he has made, and those he has yet to make, will shape the path of our prosperity, the direction of our politics and our relationship to the world.
Several weeks ago, the House Financial Services Committee approved an amendment that would quite negatively impact our economy's future well-being. If passed, this change could hamper GDP growth for decades to come.
Offered by Congressman Ron Paul, the amendment vastly expands the Congressional Accounting Office's auditing powers over the Federal Reserve. Consequently, the Federal Reserve's cherished independence would be drastically curbed. Every unpopular action the Federal Reserve made could potentially be scrutinized by vote-seeking politicians. This would effectively intertwine politics into the serious business of running the economy - and if the Soviet Union taught us anything, that is a terrible, terrible idea.
Imagine, for example, if this policy had been in place three decades ago - during the 70s and 80s. The great economic challenge of those decades was stagflation, a ruinous combination of high inflation, high unemployment, and stagnant economic growth initiated by oil shocks. Presidents from Nixon to Carter attempted to combat the demon, instituting policies that ranged from price controls to handing out WIN (Whip Inflation Now) buttons.
The problem with stagflation, however, was that defeating it required extremely unpopular action - action no poll-reading politician was willing to take.
Rarely has a Senate Banking committee hearing been so entertaining. I have listened to this clip now three times and in it I have a new found respect for Senator Jim Bunning of Kentucky. To call Chairman Bernanke the living definition of a moral hazard is long overdue. Some highlights:
Chairman Greenspans attitude toward regulating banks was much like his attitude toward consumer protection. Instead of close supervision of the biggest and most dangerous banks, he ignored the growing balance sheets and increasing risk. You did no better. In fact, under your watch every one of the major banks failed or would have failed if you did not bail them out.
Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.
Senator Bunning now joins Vermont Senator Bernie Sanders in trying to block Bernanke's reappointment by putting a "hold" on it when it reaches the Senate floor. Essentially that means the Senate would need 60 votes to approve the nomination, rather than a simple majority.
Let's just cut to the chase, as a regulator Chairman Bernanke has been a dismal failure.
The full comments of Senator Bunning are below the fold.
Update [2009-12-3 21:41:43 by Charles Lemos]: Senator Jim DeMint, Republican of South Carolina, has also placed a "hold" on the nomination of Federal Reserve Chairman Ben Bernanke. Unlike Senator Bunning and Sanders, however, Senator DeMint's hold is conditional upon an audit of the Fed. More at the The Hill.
I have a new found respect for Senator Jim Bunning of Kentucky. To call Chairman Bernanke the living definition of a moral hazard is long overdue. Let's just cut to the chase, as a regulator Chairman Bernanke has been a dismal failure.
When a hurricane passes over the land, spreading its surface with wrecks, they who survive its fury, though for a while stupified with terrour, soon recover their faculties, and set about to free the soil of the shivered fragments, and reconstruct their edifices in a mode better able to sustain the violence of future tempests. We are now in this condition. A hurricane has passed over our land, and the traces of its wrath are scattered around us. We have spent a sufficient time in the inactivity of dismay, and it is now proper to bestir ourselves, and make preparations for the future. It is particularly incumbent on those who are imbued with economick principles, and animated by a sincere desire to promote the lasting good of their country, to exert themselves in forming a correct publick opinion as to the course to be pursued. We lay claim to the latter of these qualifications, and obey its promptings to urge upon our readers that plan which we think alone has the recommendation of perfect accordance with the principles of democracy, and which alone promises, as its result, "the greatest good of the greatest number."
Our plan may be stated in a phrase of the utmost brevity; for it consists merely in the absolute separation of government from the banking and credit system. Bank and state have been hitherto joined in an unholy union, and we see the fruits of the connexion. Let us now try if we cannot divorce the ill assorted pair, and by so doing promote the prosperity of both, and of all dependant upon them. - William Leggett
The above is from an essay entitled Separation of Bank and State written by William Leggett, one of the most prolific political essayists of the Jacksonian era. A defender of classical laissez-faire economic liberalism, Leggett wrote for a number of New York newspapers and journals. This particular essay, which today we might term an editorial, was published in the [New York] Plaindealer on May 23, 1837 just two months into the Presidency of Martin Van Buren. I bring up the date because two weeks prior on May 10, 1837, the second of the great economic downturns of the nineteenth century, the Panic of 1837, began in earnest when every New York bank stopped payment in specie (gold or silver coin). In truth, the Panic had been building for quite some time. During the first three weeks of April two hundred and fifty businesses and trading houses failed in New York City alone. The Panic of 1837 is extraordinary by any measure but for purposes of brevity let me cite one fact: out of eight hundred and fifty banks then operating in the United States, three hundred and forty-three closed entirely, sixty-two failed partially, and the system of State-chartered banks received a shock from which they never fully recovered.
Today those who advocate laissez-faire economic policies tend to be associated with the conservative right, but Leggett in his own day occupied a position on the left of the political spectrum. Though hired to review plays, Leggett would become the intellectual leader of the nation's first militant workingmens movement. His fiery prose reflects an egalitarian spirit - he would describe himself as a Jeffersonian - and he is one of the first essayists to look at political economy and reflect on the proper role of government in the American economy while writing for a mass audience. In his initial response to the Panic, Leggett declared, "Let the banks perish! Let the monopolists be swept from the board! Let the whole brood of privileged money-changers give place to the hardy offsprings of commercial freedom, who ask for no protection but equal laws, and no exemption from the shocks of boundless competition." Clearly, Leggett would not have been a fan of the Troubled Asset Relief Program.
Leggett, perhaps, was at his dramatic best when he described bankers as pirates and the manner in which he laid bare the all too cozy relationship between capital and government writing that "[T]hese bankers now stand before the world, by their own confession, as a crew of swindling pirates, who have been preying on the property of the community. They threw open their vaults, where they led the publick to believe that they had abundant resources of hidden treasure, and lo, not an ounce of silver or gold is there! . . . [T]heir promises now, instead of representing silver and gold, represent nothing but violated faith, and the folly of publick credulity in the honesty of soulless corporations which derive their very being from legislative corruption."