As Winston Churchill pointed out, history is written by the victors. The big end of finance, having won decisively in the global financial crisis, is in the process of rewriting history to suit its liking. The cover story in the current Atlantic by Roger Lowenstein on Ben Bernanke, titled simply, “The Hero,” is a classic example of this type of revisionist history.
I don’t know what has happened to Lowenstein. His book on the collapse of hedge fund Long Term Capital Management, When Genius Failed, is a terrific piece of reporting. People I know who were on the inside of the LTCM rescue negotiations give his account high marks. But he has increasingly fallen into the role of scrivener for powerful interests, when his previous standards of writing and his knowledge of the finance beat says he must, on some level, know what he is doing.
The Fed couldn’t have gotten better PR if it had paid for it. Lowenstein’s account has just enough muted criticism of Bernanke (he was slow to see the severity of the crisis, his critics on the left may have a point in saying he hasn’t been aggressive enough in trying to reflate the economy) to mask its hagiography.
And this sort of spin-meistering is effective. Not only did people at the Atlantic economy conference, which coincided with the release of the piece, take up the “Bernanke did a great job in the crisis” mantra (they seemed to appreciate a piece that reinforced inside-the-Beltway conventional wisdom) but the cover, with a beatific picture of Bernanke and “THE HERO” blazed across his chest, will be seen by lots of people walking by newsstands and have an impact well beyond those who read the piece. As further proof of its faux-objectivity, the title inside the magazine is “The Villain,” to highlight the way (as Lowenstein positions the piece) Bernanke is being unfairly pilloried.
I’ll turn to the major arguments shortly, but one of the things that was particularly annoying was the way it repeatedly gilded a rotting cabbage. These are devices that most readers would miss, by virtue of not reading carefully enough to recognize their construction, or not knowing the terrain well enough to discern how Lowenstein skews his account. Here are a few of numerous examples:
Lowenstein offers a key parenthetical, in discussing quantitative easing:
…we have no way of knowing whether the economy’s improvement would have been less robust, and how much so, without Bernanke’s efforts
This is a twofer: it paints a tepid, technical recovery as “robust” and gives Bernanke meaningful credit for it.
Lowenstein mentions the nervous collapse of Montagu Norman, the governor of the Bank of England during the Great Depression, as proof of how tough it is to be a central banker during a crisis. Um, Montagu had a long history of mental instability and had had a breakdown in 1912. His psychological fragility is described at length in Liaquat Ahamed’s book Lords of Finance.
Lowenstein depicts Bernanke as an apt student of economic history, when his account shows the Fed chair is either intellectually dishonest or has issues with reading comprehension:
As we began to discuss his policies, the Fed chief urged me to pick up a copy of Lombard Street, a seminal book on central banking written by Walter Bagehot, the 19th-century British essayist. “It’s beautiful,” Bernanke said of the book—obviously appreciating that Bagehot had urged central bankers to take vigorous action to forestall panics.
Huh? Most people who know anything of Bagehot can recite his famous Bagehot rule: Lend freely, against good collateral, at penalty rates. You can cherry pick Bagehot to emphasize the “lend freely” bit, and one can argue that a central bank has the power to make any collateral into “good seeming” collateral by dint of throwing enough money at it. But the message of this paragraph is that Bernanke is a faithful student of well-established principles of central banking. In fact, Bernanke has thrown central ingredients of the formula out the window: the rescue is to be only of solvent but illiquid institutions, and then it has to be sufficiently painful as to deter them from coming back any time soon.
Lowenstein takes dictation in reporting one vignette from Bloomberg’s long-running fight over Fed transparency. Keep in mind that the piece depicts Bernanke as engaged in a sincere effort to make the Fed more open, when the Fed has fought Bloomberg’s FOIAs tooth and nail and even when compelled to cooperate by court rulings, has often engaged in redactions that appear unjustifiable. This is only footprint of this long-running row in the article:
Soon after my visit, he [Bernanke] released a letter he had written to Senate leaders refuting, point by point, a spate of articles that had characterized a Fed lending program as “secret” (the names of the borrowers were secret, but not the existence of the program or its size), and that had reported the total of Fed loans and bailouts as $7.7 trillion, a wild exaggeration.
Whoa! This is what actually went down, as we reported at the time:
It’s telling that the Fed was dumb enough to try upping the ante in its ongoing fight with Bloomberg News over the central bank’s refusal to disclose many critical details about its emergency lending programs during the crisis. Any poker player will tell you you don’t raise with a weak hand when the other side is pretty certain to call your bluff…
Bernanke sent a letter that is pissy by the standards of Fed discourse…
First, it tries the sneaky device of complaining about all the bad press it is getting, and alludes in passing to the latest Bloomberg report (“one last week”). So are we dealing with the general or the specific? The attachment to the letter, which makes a series of specific claims of where the coverage allegedly was off beam, was rebutted with great speed and vigor by Bloomberg. So trying to have it both ways (attacking Bloomberg but trying to depict it as part of general critic wrongheadedness) backfired.
But what is even more striking is the tone and substance of the letter: overreaching words like “egregious,” the patently false claims that there is nothing new in the latest (and by implication, earlier) Bloomberg stories, that the disclosure issues are settled. If there was no new information given to Bloomberg, then why did the Fed fight so hard to prevent the release of information? The Fed has never been cooperative. Even with the Congressional Oversight Panel, the so called Sanders report coming out of Audit the Fed (and remember, the Fed succeeded in lobbying to narrow the scope of Audit the Fed), a new GAO report, the latest Bloomberg FOIA still pried loose more information. The Fed is clearly not interested in transparency, but keeps trying to claims that everything that anyone would want to know is public, and there really is nothing here to discuss any more.
There’s a lot more here on how misleading the Fed letter was; we suggest you read the post in full.
Right on the heels of this no-name swipe at Bloomberg, Lowenstein starts the next paragraph with: “Bernanke is bothered by attacks that seem to be little more than smears…” which in context, suggests that a pitched battle with a preeminent financial media organization about transparency and accountability is a smear. Nicely played.
Ironically, the Fed chief appears to have revealed what his true aims were in increasing Fed disclosure (which despite his claims otherwise, came in response to demands from Congress, the media, and critics):
According to Greg Mankiw, formerly President George W. Bush’s top economist and now an adviser to Mitt Romney, Bernanke earnestly believes in the democratic process; he thinks disclosure will lead to a more responsible electorate.
“A more responsible electorate”? “Responsible” in the sense of accepting the need for austerity? (The Fed has come out firmly in favor of budget cuts, in particular of social programs). “Responsible” in the sense of
accepting the central bank’s propagandarecognizing the wisdom of the Fed’s policy choices?
The use of “responsible” telegraphs that Bernanke sees the electorate as irresponsible, which puts lie to his pretenses of being responsive to democratically determined outcomes. Bernanke is interested in listening to voters only after they have been re-educated by the Fed.
Now let’s get to the thrust of the argument, that Bernanke did a great job in the crisis and its aftermath, and that critics, save maybe Paul Krugman, are ignorant populists (Krugman is presumably an educated populist). This thesis conveniently sidesteps the fact that Bernanke is at best a doctor who unnecessarily amputated both legs of the economy and is now being applauded for attaching badly fitting prosthetics to the stumps. And there are numerous experts who have criticized the Bernanke Fed, ranging from Steven Roach, Chris Whalen, former central banker Willem Buiter, as well as former Fed staffers and financial markets professionals of the non-goldbug variety.
Another central banker, Andrew Haldane of the Bank of England, has done some rough estimates of the cost of the crisis to the global economy, and the low end of his range is one times global GDP. That is such a large number that if you were to try to make the biggest banks to pay for it over 20 years, the first year charge would exceed their market value. Haldane has pointed out in other articles that big bank shareholders and executives who have equity linked pay are in the position of option-holders: they have capped downside (the authorities will ride in to the rescue) and unlimited upside. And the more volatile the performance of the underlying instrument (bank stocks) the more an option is worth. Bankers not only have powerful incentives to take risks, even worse, they are in a position to generate systemic risk, and that’s the best course of action for them. Yet last week, after another round of stress test theater, the Fed gave all but a few banks permission to pay out dividends and buy back stock rather than bolster their equity bases, even as the mortgage settlement is based on the premise that the banks are still too fragile to pay for the damage they’ve done.
Lowenstein argues, in keeping with other Bernanke defenders, that the crisis was Greenspan’s doing rather than Bernanke’s. It isn’t that cut and dried. Bernanke, as a notable monetary scholar, gave intellectual legitimacy to Greenspan’s unprecedentedly long period of low interest rates in the dot-bomb era that many argue stoked the credit bubble. Bernanke’s famous 2002 speech on deflation, which Lowenstein refers to, was a defense of Greenspan’s overreaction to the stock market bust. The unwinding of that bubble, unlike our current one, did not represent a threat to the financial system, since the speculation was not fueled by borrowing.
Bernanke was vocal proponent of the “no bubble to see here” view when he took the helm of the Fed, and argued the runup in household debt was benign, since consumer balance sheets were in good shape. But that of course was based on unsustainable home prices.
There is much that Lowenstein ignores in his piece, and that’s because it is necessary to paint such a flattering picture of Bernanke. First is the Fed’s record during the crisis. Lowenstein depicts it as a success, when you can conclude that only by dint of applying a very liberal grade scale. The only missteps he mentions are the “75 is the new 25,” the central bank’s panicked rate cuts when it realized the crisis was more severe than it thought, and the AIG bailout.
But that only scratches the surface. I’m not certain that Bear Stearns should have died. The Fed was originally going to give it a 28 day loan which some believed would allow Bear to find more capital or persuade the markets it was being unfairly stigmatized. And the Fed also created an unprecedented facility to lend to primary dealers. Had Bear gotten the loan it was originally promised, it would also have gotten access to the new program, which might have enabled it to survive. No explanation has ever been given of why the Fed changed its mind and reneged on its a 28 day loan promise, extending instead an overnight loan to carry it through to a weekend subsidized sale to JP Morgan.
But if you assume the Fed was right, Lehman was simply a bigger version of Bear, and Merrill and UBS were also known to be at risk. And most observers assumed the reason Bear was bailed out what its credit default swaps exposures, which had the potential to turn a Bear failure into a bigger mess. Yet, as we recounted at some length at time, Bernanke, Paulson and Geithner went into Mission Accomplished mode after the Bear rescue. Instead of seeing the Bear implosion as a wake up call, and mounting a full bore effort to diagnose the health of the major players, or get a grip on CDS exposures, the Fed and SEC notched up supervision only a smidge. The Fed sent a grand total of two people to Lehman, for instance. By contrast, the FDIC had to send 160 bank examiners to get a handle on a single (admittedly large) loan portfolio when Citi was on the ropes in the early 1990s.
And Lehman was a self-inflicted wound. Bernanke, Paulson, and Geithner had only one plan, and that was a private sector rescue. They didn’t even look at what the alternative might entail; they hadn’t even talked to Harvey Miller, the dean of the bankruptcy bar who had been retained by Lehman. They were utterly flat footed when the negotiations failed. Miller has stressed that the lack of any prep (including the use of a thin form bankruptcy filing) made outcomes much worse than they needed to be.
In an interview, Bernanke cut short Lowenstein on AIG, and there’s good reason why. Its original bailout was the only one I approved of; it did adhere to the Bagehot rule by applying a high rate of interest and securing the loan with all of AIG’s assets. But one also has to note that the very fact that the Fed figured out a way to make massive emergency loans to AIG undermines its “we had no legal authority” defense of the Lehman debacle. (The other excuse has been that Lehman didn’t have enough good collateral, but time has proven that to be true with AIG, plus Bloomberg-forced disclosures revealed that some of the other emergence lending, such as that to Morgan Stanley, also had dubious backing).
But the authorities not only lent AIG more money, they kept improving the terms, and allowed its intransigent new CEO Robert Benmosche to defy the original plan, which was to dismember AIG, which would have been a very effective way pour discourager les autres. That in turn resulted from the Fed’s failure to require the board to resign as one of the conditions of the rescue.
And this is all before we get to the Fed’s two-facedness about contracts. It insists contracts have to be observed strictly when they favor bankers, such as the credit default swaps contracts AIG had written, or pay agreements with bank executives and major producers that would have been worthless ex taxpayer support and Fed intervention. But it has no problem with banks running roughshod over agreements with homeowners and investors. As recounted here and elsewhere, the mortgage settlement incorporates, among other things, that wrongful foreclosures at a rate of up to 1% (which equates to 33,000 homes since 2008) is acceptable servicing and the Fed and other regulators will give it a free pass. Similarly, the Fed has joined in a effort to reverse the long-established creditor hierarchy, allowing banks to modify first liens owned by investors (and count this use of other peoples’ money towards the settlement of their own misdeeds) without wiping out second mortgages they own, as would be required contractually.
The second major theme of the piece is that Bernanke is a fine economist and ideally suited to steer the central bank now. To the extent that Bernanke is held in high regard, it says more about the state of orthodox economics than it does about his expertise. Anna Schwartz, who with Milton Friedman authored the influential Monetary History of the United States, upbraided Bernanke for his handling of the crisis, stressing that he failed to recognize that it was a solvency crisis, not a liquidity crisis (needless to say, that issue is absent in Lowenstein’s account).
Bernanke is also a firm believer in the discredited “loanable funds” view, that if you make put money on sale by making interest rates low and credit readily available, businesses will take advantage of it and borrow and invest. But that’s just silly. The cost of money is a secondary consideration in investing. The primary one is: will there be enough buyers for your output and will they pay what you need to charge to make the project work? And we can see that in the result of the Fed’s operations. As Richard Koo points out in his latest research report, the Fed has increased bank reserves by over 320% since Lehman, yet the money supply has increased only 25%.
The worst is that the Lowenstein article is long enough and consistently wrong-headed enough that there is much more I could add to this shredding, but in the interest of not taxing reader patience, I’ll stop here. I’m afraid we are due for a steady diet of this sort of thing. And even though we can’t stop it, we can let the people putting out this sort of disinformation and our colleagues know that we aren’t fooled.