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Monday, January 25, 2010 1:48 AM

Economist Steve Keen On "The Case Against Bernanke"

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Steve Keen, a widely respected economist from Australia is leading the way with a scathing attack on the qualifications of Fed chairman Ben Bernanke.

Specifically, Keen says "Bernanke's ignorance of the factors that really caused the Great Depression is a major reason why the Global Financial Crisis occurred in the first place."

Of course I agree, having said so many times over the past several years. The effect might be better coming from a top-notch economist who understands more than Bernanke does about debt.

With that backdrop, please consider The economic case against Bernanke

The US Senate should not reappoint Ben Bernanke. As Obama’s reaction to the loss of Ted Kennedy’s seat showed, real change in policy only occurs after political scalps have been taken. An economic scalp of this scale might finally shake America from the unsustainable path that reckless and feckless Federal Reserve behavior set it on over 20 years ago.

Some may think this would be an unfair outcome for Bernanke. It is not. There are solid economic reasons why Bernanke should pay the ultimate political price.

Misunderstanding the Great Depression

Bernanke is popularly portrayed as an expert on the Great Depression—the person whose intimate knowledge of what went wrong in the 1930s saved us from a similar fate in 2009.

In fact, his ignorance of the factors that really caused the Great Depression is a major reason why the Global Financial Crisis occurred in the first place.

The best contemporary explanation of the Great Depression was given by the US economist Irving Fisher in his 1933 paper “The Debt-Deflation Theory of Great Depressions”. Fisher had previously been a cheerleader for the Stock Market bubble of the 1930s, and he is unfortunately famous for the prediction, right in the middle of the 1929 Crash, that it was merely a blip that would soon pass:

“ Stock prices have reached what looks like a permanently high plateau. I do not feel that there will soon, if ever, be a fifty or sixty point break below present levels, such as Mr. Babson has predicted. I expect to see the stock market a good deal higher than it is today within a few months.” (Irving Fisher, New York Times, October 15 1929)

When events proved this prediction to be spectacularly wrong, Fisher to his credit tried to find an explanation.

A disequilibrium-based analysis was therefore needed, and that is what Fisher provided. He had to identify the key variables whose disequilibrium levels led to a Depression, and he argued that the two key factors were “over-indebtedness to start with and deflation following soon after”.

I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt. (p. 341)

Fisher then argued that a starting position of over-indebtedness and low inflation in the 1920s led to a chain reaction that caused the Great Depression.

Fisher confidently and sensibly concluded that “Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way”.

So what did Ben Bernanke, the alleged modern expert on the Great Depression, make of Fisher’s argument? In a nutshell, he barely even considered it.

Bernanke is a leading member of the “neoclassical” school of economic thought that dominates the academic economics profession, and that school continued Fisher’s pre-Great Depression tradition of analysing the economy as if it is always in equilibrium.
Keen lists 9 points of Fisher's debt deflation thesis that Bernanke ignored. Furthermore, Keen picks apart some of Bernanke's essays on the Great depression highlighting the fact ...
Crucially, even though Bernanke notes at the beginning of his book that “the premise of this essay is that declines in aggregate demand were the dominant factor in the onset of the Depression” (p. ix), his equilibrium perspective made it impossible for him to see the obvious cause of the decline: the change from rising debt boosting aggregate demand to falling debt reducing it.

Bernanke’s failure

If this were just about the interpretation of history, then it would be no big deal. But because they ignored the obvious role of debt in causing the Great Depression, neoclassical economists have stood by while debt has risen to far higher levels than even during the Roaring Twenties.

Worse still, Bernanke and his predecessor Alan Greenspan operated as virtual cheerleaders for rising debt levels, justifying every new debt instrument that the finance sector invented, and every new target for lending that it identified, as improving the functioning of markets and democratizing access to credit.

The next three charts show what that dereliction of regulatory duty has led to.....
I do not want to reproduce too much of Keen's article, it is best if you read it in entirety on his site otherwise you may miss some excellent charts and explanations. However, I do want to highlight Keen's conclusion.
Bernanke, as the neoclassical economist most responsible for burying Fisher’s accurate explanation of why the Great Depression occurred, is therefore an eminently suitable target for the political sacrifice that America today desperately needs. His extreme actions once the crisis hit have helped reduce the immediate impact of the crisis, but without the ignorance he helped spread about the real cause of the Great Depression, there would not have been a crisis in the first place. As I will also document in an update in early February, some of his advice has made America’s recovery less effective than it could have been.

Obama came to office promising change you can believe in. If the Senate votes against Bernanke’s reappointment, that change might finally start to arrive.
Bernanke Rally Cry

Over the weekend, Bernanke supporters we out in full force. Obama all but waved flags for a man hugely responsible for this crisis. And Senators Chris Dodd And Judd Gregg Confident Of Bernanke Confirmation.

On the other hand please consider the most wishy-washy endorsement in history. It comes from Paul Krugman in The Bernanke Conundrum.
Where do I stand? I deeply admire Mr. Bernanke, both as an economist and for his response to the financial crisis. (Full disclosure: before going to the Fed he headed Princeton’s economics department, and hired me for my current position there.) Yet his critics have a strong case. In the end, I favor his reappointment, but only because rejecting him could make the Fed’s policies worse, not better.

... here comes my defense of a Bernanke reappointment — any good alternative for the position would face a bruising fight in the Senate. And choosing a bad alternative would have truly dire consequences for the economy.

Furthermore, policy decisions at the Fed are made by committee vote. And while Mr. Bernanke seems insufficiently concerned about unemployment and too concerned about inflation, many of his colleagues are worse. Replacing him with someone less established, with less ability to sway the internal discussion, could end up strengthening the hands of the inflation hawks and doing even more damage to job creation.
Wow. That's some ringing "endorsement".

I will take my chances. Besides, we will be stuck with Bernanke for 14 more years anyway as he will still have a voting seat on the Fed.

The Fed should be disbanded. Clearly the market can set interest rates far better than the Fed did. Flipping coins might have worked better. It would be nice to get a chairman who understands the need to dismantle the Fed but that is not the way bureaucrats think.

Squawking Like A Half-Plucked Chicken

In spite of the outward confidence displayed by a handful of senators, Obama would not be running around squawking like a half-plucked chicken, attempting to garner support for Bernanke, if the votes were guaranteed to be there.

Indeed, this outward display of confidence squawking shows a distinct lack of confidence.


I spoke with Yves Smith at Naked Capitalism on Sunday afternoon. She is going to post on this as well. From Yves ... "You need to tell readers to vote "no" on cloture for Bernanke, not just "no" on Bernanke."

Please make a note of that. Cloture is a vote to end the discussion. It takes 60 votes to do that. It only takes 51 votes to appoint Bernanke. He likely has those 51 votes. Does he have 60? I don't know. But let's make it very difficult.

Dump Bernanke - How You Can Help!

Please review Dump Bernanke - How You Can Help! Even if you already called or emailed, do it again.

This time flood the senator's email inboxes as well. Jam em. And do it Monday, Tuesday, and Wednesday.

Maybe the votes are there. Maybe they aren't.

It's important to make sure that if the vote's are not there, it stays that way. You can help.
Keep the pressure on.

Call and email your senators with the same message.

I had someone email me over the weekend that his senator's email box was filled up. The goal is to fill up the email boxes of all the senators.

Here is a directory sorted by state of all the Senators of the 111th Congress.

You can also look up the phone numbers in the Online Directory For The 111th Congress but the first link may be easier to use for just senators.

What To Say: Make it simple so as to not tie up the lines ... "Vote no on cloture to end debate on Bernanke. I am opposed to the reappointment of Bernanke [give your personal reason]. Anything to stop Bernanke including a fillibuster is fine by me."

That part in red is crucial. Specifically say "Vote No on Cloture".

Concentrate on the senate. The house has no say on this.

Be prepared to name your city and give a zipcode. Here is the Zip-Code Database.

Call and email your senators with the same message.

Here is a directory sorted by state of all the Senators of the 111th Congress.

You can also look up the phone numbers in the Online Directory For The 111th Congress but the first link may be easier to use for just senators.

Send A Message

Remember it takes 60 votes to end the debate on Bernanke, but once an actual vote is called. it only takes 51 for confirmation.

Call and Email Now!

Mike "Mish" Shedlock
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