How Did We Luck Out at the Fed?

by Neil H. Buchanan

This is the season that the Nobel Prizes are given out, including the fake one for "economic sciences."  I have written more than enough rants about the faux-Nobel in economics over the years, so I will spare longtime Dorf on Law readers another detour down that blind alley.  (Those who are interested or were unaware of the fraudulence of that prize, however, can click here.)

Instead, I will use today's column to comment on one of this year's recipients of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, the former Princeton professor and former Fed Chair Ben Bernanke.  After describing Bernanke's economy-saving work at the Fed, I will then ask how we -- a country that has seen its governing institutions go from bad to worse -- have somehow created and maintained such a fantastic central bank.  Short answer: Lucky, I guess.

I am not arguing that the Fed is perfect.  As I will explain (again) below, I think the Fed is making a big mistake right now; and I am not alone.  That mistake, moreover, could destroy the US and global economies, thus removing the tiny remaining hope that liberal democracy can survive the Trump/Brexit/Orban/Balsonaro/Brothers-of-Italy resurgence of fascism.

That is, to say the least, a rather important caveat.  Even so, the Fed is arguably the best central bank that anyone could reasonably hope to have created, and its current mistake is at least a matter of good faith.  Small consolation, perhaps, but important nonetheless.

But back to the non-Nobel.  This year, the central bankers in Sweden -- another country, by the way, that is in the scary early-to-middle stages of a fascist turn -- awarded their overhyped prize to three white men, two of whom toil in obscurity (Douglas W. Diamond and Philip H. Dybvig).  The other is Ben Bernanke, whose post-Fed life involves being an eminence grise (with a titled position at Brookings), and whose name and face are immediately recognized even by many people who are not policy wonks.

That might seem a harsh description of Diamond and Dybvig, but consider that the headlines in The New York Times and The Washington Post, respectively were: "Three Economists, Including Ex-Fed Chair Bernanke, Win Nobel for Work on Bank Crises," and "Bernanke, two other Americans win Nobel Prize in economics."  For fans of the show "Brooklyn Nine-Nine," this is something like the Medal of Valor ceremony where Charles Boyle was upstaged by Sergeant Peanut Butter, the hero horse.

That is in a key sense a completely off-base comparison, of course, because Bernanke is hardly a novelty act.  He is getting the headlines because, even though it is his economic research that earned his portion of the prize in question, he has spent the last twenty years saving the world.  Am I exaggerating?  Not at all.

It started inauspiciously, with the lifelong Republican leaving academia to serve very briefly as Chair of the Council of Economic Advisors at the beginning of George W. Bush's second term.  He was then appointed and confirmed to succeed Alan Greenspan as Fed Chair.  Anyone was going to be better than the self-important Greenspan (who, among other things, is one of Washington's Ayn Rand idolators), but other than having a reputation as a top-ranked economist who is not a jerk -- which is honestly a surprise -- there was nothing about Bernanke that made people think that he would turn out to be a hero.

As it happens, the economic scholarship for which Bernanke is being honored is directly relevant to what made him important to non-economists.  The Swedish Royal Bank waits decades to confer what amount to lifetime achievement awards, but they always cite very specific papers in their announcements.  In Bernanke's case, they lauded a 1983 analysis that demonstrated something extremely important: bank runs in the 1930's were a major cause, not an effect, of the Great Depression.  That is huge, because when a problem emerges that could become a bigger crisis, we need to know how to stop things from spiraling out of control.  Someone who misunderstands the history might think that protecting the banking system was not necessary (even pointless and wasteful), but Bernanke knew otherwise.

Perhaps another Fed Chair would have contacted Bernanke for his expertise if Bernanke had still been in academia in 2008, but as luck would have it, the right person was in the right job at precisely the most important time.  He did not need to call the top expert, because he was the top expert.  And the advice that he gave himself, and then convinced his colleagues to support, was to have the Fed provide a massive influx of liquidity into the banking system to prevent the Great Recession (known in the rest of the world as the Global Financial Crisis) of 2008-09 from becoming the second Great Depression.

And conservatives hate him for it.  The libertarian right in the US (and probably elsewhere, for all I know) has decided that being against The Government necessarily requires that we "End the Fed."  Why?  They are sure that "[o]nly decentralized power and decision-making, based on millions of individualized situations, can arrive at what risks and behaviors each individual should choose," which is why they think that people should be allowed not to wear masks and to refuse vaccines during a global pandemic; and they are similarly sure that if people individually decide to do things that will cause a run on a bank, then they should be allowed to cause a run on a bank.

The quote in the previous paragraph was from the omnipresent Senator Rand Paul, who is one of the End the Fed true believers.  And it makes sense that a person who can look at an actual contagion and think, "Hey, everything will be fine if everyone makes decisions that ignore their external effects on everyone else," would also think that financial contagions are not caused by people making decisions that spill over onto the entire banking system.  Paul was almost as much of an irritant for Bernanke in monetary policy as he has been for Dr. Anthony Fauci in public health policy, with equally groundless confidence in his own brilliance in both areas.

To be clear, Paul is hardly an outlier among Republicans in attacking the Fed.  In the pre-primary stages of the 2016 presidential campaign, CNN Business's Patrick Gillespie reported that Paul -- even though Bernanke was no longer Fed chair by that time -- went out of his way to call Bernanke "arrogant," while joining with Ted Cruz in pushing their ill-fated "Audit the Fed" nonsense (a rebranding or End the Fed).  Even so, Gillespie's article was headlined "GOP candidates slam Bernanke and the Fed," noting only that Paul and Cruz were the "most vocal" in attacking the Fed.  The entire unholy field of candidates piled on the Fed.

Indeed, the Republicans in the Senate have been more than willing to attack the most qualified -- and completely mainstream -- nominees even to other economic positions, rejecting Bernanke's dissertation advisor Peter Diamond's nomination in 2010 to Obama's Council of Economic Advisors.  (Peter Diamond won the faux-Nobel himself in 2010.  This year's co-winner is Douglas Diamond.)

Even in the face of that insanity, not only have we had two more excellent Fed chairs after Bernanke's departure (Janet Yellen and the current Chair, Jerome Powell), but we were also spared the weirdos and cranks that Trump tried to put on the board of our central bank.  Why are we getting so lucky?

Six years ago, Professor Dorf and I published an article on this very topic: "Don't End or Audit the Fed: Central Bank Independence in an Age of Austerity."  There, we argued that the Fed's current level of political independence -- policymakers nominated and confirmed by politicians, but substantive policy decisions not reversible by the political branches -- has turned out to be just about right.  Even so, if the nomination process goes awry, everything will fall apart.  The people who built the Fed did a great job in the first place, even though it was a balancing act, and now we have to keep it from failing.  How long will our luck hold out?

I noted above that, even though I have positive things to say about Powell's Fed tenure, he and his colleagues might be in the process or destroying the economic and political systems of the United States.  Although I believe that the American political system is already doomed, any tiny shred of remaining hope will be destroyed if the economy tips into even a mild recession.  The Fed, however, is risking something much more serious than that.

As Paul Krugman argued last week, the Fed seems to believe that it will be able to steer us out of any recessionary overreaction to its recent inflation-fighting campaign.  Unlike Krugman, I do not believe that the Fed should have been as worried about long-term inflation as it is, but both of us agree that they are doing too much now.

Even so, it could be worse.  I have not checked with Professor Dorf about this recently, but I suspect that we are still on the same page.  In any case, I will speak for myself in saying that we are much better off living with a Fed that is run by sober-minded people who are trying to respond to reality rather than a Fed that could have been taken over by people who want to test-drive Ayn Rand's pet theories or who would deliberate tank the economy to benefit Republicans in the 2022 and 2024 elections.

In the long run, we are still all dead.  Even so, it matters not only how quickly we get there, but how.