Man of the Year!

Ben Bernanke has been received praise and awards like Monopoly money. Time Magazine's Person of the Year, Foreign Policy's Intellectual of the Year, etc. Even though there are some lunatic fanatics among us who are pointing to a double-digit unemployment rate, and a continuing slide in non-Governmental--productive--components of GDP as evidence that the "recession" is not over and that a "depression" may still be possible, it is clear to the mainstream media and to many economic thinkers that Ben Bernanke, chairman of the Federal Reserve Bank, staved off the next Great Depression. This was done, supposedly, through his strategic implementation of the corporatist TARP bailouts and through his wise lowering of interest rates. The first question I ask is how do we know this? There really is no evidence that, had Bernanke done nothing, things would not have been better today.
But lets forget about today. Lets consider tomorrow. How will each of his actions eventually impact us? While I do not claim to know specifics, I know that there is no free lunch. "Inflation is always and everywhere a monetary phenomenon." Bernanke believes that the economic recovery we have seen so far remains fragile. Due to this fear he has decided to keep interest rates at essentially zero and keep the printing presses running. There will be inflation at some point in the future. While Chairman Bernanke claims that the Fed has the tools to raise interest rates and control inflation without affecting economic activity when needs be, I am extremely skeptical of this promise of the ultimate free lunch. It is clear that if our bills had another country's name on it, a currency collapse would be a definite possibility. Nobody knows if a currency collapse is realistic, and I have seen data that shows that it is unlikely, but it is not impossible. It would be an ultimate Black Swan, a high-impact, improbable event.

What about the bank bailouts? He may have saved the banking system, but is a system that almost drives us into a Global Depression, as the experts willing to congratulate Bernanke assume, worth saving? Capitalism is about profit and loss. Without the threat of loss, we have fascism of the worst variety. Investment bankers know they are playing with other people's money. These are the same incentives that helped cause the mess. This cannot work and are illustrative of an unsound system. These incentives, more likely than not will lead to further financial "crises."

Maybe I am wrong; maybe Chairman Bernanke with the help of President Obama will be able to engineer an economic recovery without damaging inflation. Maybe they will pull away the punch bowl away just in time as the party gets going. Or maybe, like all central planners dealing with imperfect knowledge and incorrect incentives, they will fail miserably in their "goals" of effectively engineering a $14 economy. Whether I am right or whether they are the point remains: it is too early to congratulate Ben Bernanke on his work until the final result of his work is seen. Many of the now-villified investment bankers were congratulated and rewarded with million dollar bonuses. The point was that they were accumulating all types of hidden long term risks. Bernanke is receiving the same treatment: short term accolades while he is potentially taking on massive amounts of long-term risks. It was a mistake for investment bankers to be compensated in this short-term manner and it is a mistake to praise Bernanke before the costs of his actions are seen. What if his policies create massive inflation or even stagflation in the long-run? Will he even be blamed, or will Obama, or Milton Friedman, or Congress, or the Republicans, or even Keynes? We now know what Paul Krugman knew--and advocated for--in 2001: that the Federal Reserve's response to the Tech Boom and Bust helped cause the Recession of 2008. Imagine if Greenspan and Bernanke, the engineers of that monetary stimulus, were congratulated in 2001 for their work in avoiding a prolonged recession! We are doing the same thing now! The Federal Reserve can cause recessions by keeping interest rates too low and creating malinvestment. They are doing it now. The chickens will come home to roost. And just as 2008 was a larger recession than 2001, the Depression of 2012 may very well be larger than 2008...assuming we do not face a currency crisis before then.

The financial system is more fragile and more prone to negative black swans than it has ever been before.