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Friday, August 21, 2009 1:59 PM

Orwellian Madness "Bernanke Saved The World"

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The MarketWatch Headline Bernanke: We Saved The World is the height of Orwellian madness.

Please consider the "full story" We saved the world from disaster, Fed's Bernanke says.

In a speech at the Kansas City Fed's annual retreat in Jackson Hole, Wyo., Bernanke summarized a hellish year and explained modestly how he and his central bank colleagues saved the world from a bigger disaster.

"The world has been through the most severe financial crisis since the Great Depression," he said. "As severe as the economic impact has been, however, the outcome could have been decidedly worse."

If the Fed, other central banks and other government leaders hadn't acted in a coordinated and aggressive way in September and October of 2008, "the resulting global downturn could have been extraordinarily deep and protracted," Bernanke said.

The policy response "averted the imminent collapse of the global financial system, an outcome that seemed all too possible to the finance ministers and central bankers."
Reflections on a Year of Crisis

To be fair to Bernanke, he never directly claimed to have "Saved The World". That is a trumped-up headline by MarketWatch.

Here is the key snip from his Jackson Hole speech Reflections on a Year of Crisis.
Since we last met here, the world has been through the most severe financial crisis since the Great Depression. The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge.

As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal, and financial policies around the world have been aggressive and complementary. Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk. We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted.

Although we have avoided the worst, difficult challenges still lie ahead. We must work together to build on the gains already made to secure a sustained economic recovery, as well as to build a new financial regulatory framework that will reflect the lessons of this crisis and prevent a recurrence of the events of the past two years. I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress toward both those objectives.
Serious Risk vs. Saved the World

There is a difference between "Serious Risk" and "Saving the World". However, that is as far as I will go in defending Bernanke. It is important to understand that we are in this crisis because of the policies of Central Bankers in general and the Greenspan and Bernanke Fed in particular.

Both Greenspan and Bernanke have fostered an environment that threw money at every problem. The worldwide credit boom and housing bubbles were a direct result of Central Bank policies. Thus, giving credit to Bernanke is like giving credit to a doctor for amputating a cancerous limb after mistakenly cutting off three perfectly healthy limbs.

The difference between the Greenspan's alleged "success" and Bernanke's struggle to save the world is Greenspan had a wind of consumers' willingness to go deeper in debt blowing at his back. Bernanke has the wind of boomers fearing retirement in the midst of falling home prices and impaired bank balance sheets blowing stiffly in his face.

That difference is immense. For further discussion of the problems facing Bernanke and how little power the Fed really has when consumer attitudes have changed, please see Belief In Wizards Runs Deep.

Bernanke's Self-Promotion Self-Vindication Campaign

Bernanke's Jackson Hole speech is part of his campaign for re-appointment to the Fed. Previously, Bernanke had a cream-puff interview with 60 minutes as well as three fluff installments on "The NewsHour with Jim Lehrer" as discussed in Bernanke Goes On Self-Promotional Media Blitz.

Bernanke's media blitz is as galling as it is unprecedented. No Fed chairman in history has openly or brazenly campaigned for reappointment.

The most galling thing is that nowhere along the way did Bernanke ever mention his role, the Fed's role, or central banker's role in general for creating this crisis.

Did The Fed Really Save The World?

Even Bernanke admits that "We cannot know for sure what the economic effects of these events would have been ..." thus we still cannot be sure if his policy actions were correct. Indeed some highly respected individuals suggest they were the wrong thing to do.

Elizabeth Warren On The Policy Response

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Please listen to that sobering interview, in entirety. It is about 9 minutes long. Elizabeth Warren rips PPIP (the public-private investment plan) to shreds, and questions the policy responses that have still left toxic assets on the balance sheets of banks.

Warren: ".... In addition to what we've got with the toxic assets, we've got a real problem coming on commercial mortgages.... looking ahead to 2010, 2011, 2012 we are potentially looking at 50-60% default rates. This is a very significant problem concentrated with intermediate and smaller banks"

My favorite exchange starts just after the 7 minute mark.

MSNBC: In hindsight was Paulson right? If Congress did not write that $700 billion check would banks have collapsed?

Warren: I have to say I think there would have been some real pain. There are some businesses today that are alive that would have been wiped out. However, I am just not convinced at all that we would have gone into a death spiral"

MSNBC: With the facts he knew at the time, was it the right call?

Warren: (struggling to be polite) "You know, let me say it this way. The question about whether or not the world as we know it has ended, depends on what you think the world is as we know it. If you think the world as we know it, are a handful of huge financial institutions, the dinosaurs that roamed the earth, then you're right. They are not going to exist without huge infusions of government money. On the other hand if what you really believe is that our economy and our world is 115 million American households you start to see it very differently. And you say, you know if the dinosaurs are gone there are still a lot of stuff to be done.

High Praise For Elizabeth Warren

I have high praise for Warren. It takes a lot of courage to say what she did on the record. Moreover, I am certain she is correct about what she hints the real world is: American households and a large consortium of small to mid-sized banks as opposed to a few dinosaurs that ought to be extinct.

Bernanke Saved The Dinosaurs

Bernanke did not "save the world". All Bernanke did was prolong the lives of a few ailing dinosaurs at great expense to US taxpayers.

Elizabeth Warren, not Bernanke should have given a speech at Jackson Hole.

Mike "Mish" Shedlock
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