Bill Black: What if Bernanke Had the Character to be Candid?

Yves here. I suspect NC readers can go even further will Bill Black’s question!

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posed from New Economic Perspectives

David Wessel has just published a fantasy piece in the Wall Street Journal that asks the question “what if Bernanke could be blunt” in his Congressional testimony later this week. Here are the first two things that Wessel envisions a blunt Bernanke as telling Congress:

One. [T]he U.S. is doing a heck of a lot better than the rest of the developed world.

Two. You in Congress are hurting the economy now by allowing the sequester to stick and hurting the economy in the future by refusing to deal with long-term deficits. The Fed is trying to offset this, but there’s only so much we can do.

Wessel’s column has prompted me to ask a more important question: what would Bernanke tell Congress if he had the character to be candid? Many witnesses have been blunt with Congress. The problem is that one can be a blunt and dead wrong. It takes character for a Fed Chairman to tell Congress that the economy is screwed up because the Fed screwed up on his watch. That candor is what the Nation needs and the character that produces such candor has been sadly lacking among Fed chairmen.

I have written numerous articles explaining that the Fed had the unique statutory authority under Home Ownership and Equity Protection Act of 1994 (HOEPA) to ban liar’s loans issued by lenders who did not have federal deposit insurance. I have shown that Alan Greenspan and Ben Bernanke received ample warnings of twin epidemics of mortgage fraud consisting of endemically fraudulent “liar’s” loans and appraisal fraud. These frauds were overwhelmingly driven by lenders and the perverse incentives their compensation schemes produced among their agents, particularly loan brokers.

Greenspan refused to use HOEPA to ban liar’s loans and refused to even find the facts about liar’s loans. Bernanke did the same, until he finally give in to intense Congressional pressure and banned liar’s loans in mid-2008. Even then, he delayed the effective date of the rule by 15 months. One would not wish to inconvenience fraudulent lenders.

I explained in prior columns that the appraisers’ formal warnings about mortgage fraud began in 2000 and that the FBI’s famous twin warnings that a mortgage fraud “epidemic” was emerging that would cause a financial “crisis” were made in 2004. I also pointed out that real regulators, operating with far fewer facts and resources, had come to the correct conclusion about “stated income” loans in 1990-1991 and driven them out of the industry. Greenspan and Bernanke both could have acted via regulation to end the fraud epidemic and avoid the Great Recession. Wessel, like Greenspan and Bernanke, conveniently assumes the Fed’s role as a financial regulator out of existence even though Wessel’s focus is on the Great Recession.

It is good to see that Wessel recognizes that the U.S. recovery, while weak on the jobs front, is vastly superior to the Eurozone. The Eurozone as a whole has been forced back into a gratuitous second Great Recession by austerity. The periphery has been forced into a gratuitous second Great Depression, with unemployment rates roughly four times our rates. It is also good to see that Wessel recognizes that the sequester, an austerity program, was an effort to force the disastrous European policies on the U.S. even though everyone could see that the European policies were failing and the U.S.’s stimulus program was producing growth. Yes, it would be good if Bernanke were to tell Congress candidly that austerity in response to a Great Recession is akin to bleeding a patient in response to illness.

There is only one problem with Wessel’s fantasy. He’s writing for the WSJ. So the next line in his fantasy requires Bernanke not to be blunt to Congress but to tell them an internally-inconsistent myth. The myth is that: “You in Congress are hurting the economy now by allowing the sequester to stick and hurting the economy in the future by refusing to deal with long-term deficits.” The first clause is true. The second clause is false and it contradicts the first clause. The U.S. has had (simultaneously) far larger deficits, far greater economic growth and employment, and reasonably stable prices. The claims that the deficit will spiral out of control are based on projections that are so unreliable as to be exercises in fiction. Recall the recent hysteria about the “massive” federal budget deficits and how they supposedly would grow without limit and then strangle the economy. The reality is that modest (relative to the size of our economy and the immense loss of wealth and demand caused by the Great Recession) stimulus plus the automatic stabilizers have produced a moderate recovery of economic growth and a slow recovery of private sector employment. Our states and localities have been running pro-cyclical budgets and employment practices in response to the Great Recession, which has substantially weakened our recovery. Public sector employment has fallen materially, exacerbating unemployment and delaying our recovery from the recession.

Even our moderate recovery, however, has been enough to produce a sharp fall in the federal budget deficit. Indeed, the fall has been far too rapid and is slowing our recovery. A candid Bernanke would explain to Congress that their insistence on debt hysteria is the leading problem slowing the U.S. recovery and that the Fed cannot counteract the harm that Congress and Obama are doing when they inflict austerity.

A candid Bernanke would tell Congress that there was nothing intrinsically “good” or “bad” about a federal budget deficit or surplus for a nation with a sovereign currency that borrows in its own currency and allows its value to float freely. A candid Bernanke would tell Congress that if the U.S. runs a budget “surplus” and our foreign balance were zero then our domestic private sector would have to be in “deficit.” In the modern U.S. context, if you believe that the phrase “federal budget surplus” is a favorable phrase indicative of financial health and moral superiority you must also believe that a “domestic private sector deficit” is a good thing indicative of financial health and moral superiority. The words “deficit” and “surplus” have clear, powerful connotations in everyday life. Deficits are bad and surpluses are good. When we are discussing fiscal policy, however, one sector’s deficit is another’s surplus and context is everything. A candid Bernanke would make this point bluntly to Congress and Wessel and even more bluntly to the European Union’s and IMF’s leaders.

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  1. nonclassical

    Yves, WK Black, Michael Hudson, Robert Johnson, Elizabeth Warren, Amy Goodman, are truthsayers in the classical sense..

    we applaud you, and thank you…

  2. Sundog

    A candid Bernanke would advertise that sooner than most would like to imagine, oil will be priced in RMB, and that the US will have no recourse but to issue debt denominated in RMB.

    It will be entertaining as that day approaches and neither party wants to be in the driver’s seat. Palin was fun but we ain’t seen nothin’ yet.

    1. Banger

      Not very likely. Most of the world still favors U.S. dollar hegemony in part because the U.S. military superiority is the source of some kind of global stability and open trade routes. China, as a global imperial power, would not be trusted to all of a sudden take on the role of global hegemon.

  3. allcoppedout

    How do we tell what’s what on anything these days? The UK economy is doing well if you listen to the mainstream, but obviously is not whether our financial sector debts are really a crock or not. Of course, we’re in deeper if this sector’s debts are like Anglo-Irish or Northern Rock on a massive scale.
    Frankly, our economy has been dire since I was born – though I don’t claim the credit. Our great industries have almost gone and so have our nationalised services, high streets and pubs. I don’t know what has replaced them even though I can site the relevant statistics – you just don’t see where the new jobs are as you could in the past.
    Politicians everywhere talk of bringing good jobs back, but this makes no sense because machines have changed all that. They pump education as the answer, but this flies in the face of graduate unemployment/under-employment even in China. If I walk into out local job centre there are no jobs, the local paper has none, local bars don’t need staff and so on. I can find work, but won’t work in universities because on moral grounds of the fees/debt and uselessness of the qualifications for not already elite students.
    We don’t need any Bernanke types to tell the truth – they can’t see the wood for the trees. What we need is some means of making thousands of real people’s situations come to life as their lying words come out.

  4. Clive

    There was a book written during the 1980’s self-help boom entitled “Get Out of Your Own Way: Overcoming Self-Defeating Behavior”. With the current obsession in mainstream economic and political thinking on “sound money” and general deficit hawkery, I wonder if we shouldn’t all club together and send out one copy each to every member of congress, the Fed, the ECB and the IMF. Perhaps it would cure them of their sound money OCD ?

  5. Ruben

    “Indeed, the fall [in the federal budget deficit] has been far too rapid and is slowing our recovery. A candid Bernanke would explain to Congress that their insistence on debt hysteria is the leading problem slowing the U.S. recovery …”

    In the paragraph above it seems to me that Bill Black is denouncing as hysterically counterproductive both demands to reduce the federal budget deficit and demands to reduce the public debt.

    However, by reading several posts in different places about the sectorial balance equations leading to MMT I gather that a good federal budget deficit is brought into existence by gov’t spending money into existence in excess of tax revenue, not by issuing public debt instruments.

    Thus wouldn’t a more logically consistent stance be to demand public debt reduction while at the same time demanding bigger deficits?

    Honest question.

    1. Glasshammer

      “because he wears nice suits and has a nice haircut indicating his orderly mind etc.”

      Many reformers switch from plain clothed representative of the people to well groomed embodiment of order. Giving people the imagery they want when they want is the key.

      “Then, of course there is always the fact that physical violence is just not part of the culture of the average upper-middle class leftist in the U.S. or Europe.”

      Your culture changes a great deal when you move from upper-middle to lower-middle or upper-lower.

    2. nonclassical

      “honest question”,

      but have you deciphered truth of what “private sector” has been doing to transfer assets to “paper debt”, and profits into “investments” in banking secrecy jurisdictions??

      ..privatizers (think GE-Boeing, etc) pay no taxes, yet get “returns”, having done the exact opposite of austerity-protecting their assets, by “financializing”…therefore have shifted “austerity” and taxes off on public sector-government….

    3. Samuel Conner

      A thumbnail sketch answer to this question, I think, is that there is not as much difference between deficit spending funded through Treasury debt sales and deficit spending funded through Treasury money creation as might superficially appear. As I understand it, money creation by the Treasury is still public debt — it’s zero maturity and zero coupon public debt. One might wonder what obligations this debt entails: the government is obligated to accept it in payment of tax obligations.

      You will sometimes see Treasury-issued money likened to a non-interest bearing checking account with the Fed, while Treasury issued term debt is likened to a savings account with the Fed. They’re both public debt, but with different properties in terms of maturity and coupon. These differing properties mean that the mix of Treasury money and Treasury debt is a policy decision. The government might want to make safe interest bearing instruments available to savers, for example.

      I don’t think that Professor Black is being inconsistent.

      1. F. Beard

        The government might want to make safe interest bearing instruments available to savers, for example. Samuel Conner

        Why should the government waste its limited ability to create fiat without price inflation on giving the rich a risk-free return? Fascist much?

        Bill Mitchell calls borrowing by the monetary sovereign “corporate welfare.”

        I feel like taking a Tally Stick to you for even mentioning it. Are you a banker?

    4. Ben Johannson

      Depends on with whom you speak. Some MMTers believe the government should stop issuing debt instruments, while others think they should be kept as a risk-free savings vehicle.

      1. Ruben

        Mmmh, I guess this boils down to some MMTers being more pro-finance industry whereas others will happily see public debt disappear as a risk-free portfolio option.

  6. PaulArt

    I am actually zoning out. I think I have had enough of decent diplomatic debate. Bill’s salve and others like this do not work anymore. They do not even dull the pain. The Pitch Forks are long past, really really long past. The only thing these fraudsters in Congress and Senate, not to mention K-Street understand is cold, calculated bodily harm and physical pain and fear that stems from that. I really do not understand what the youth in Europe are doing – I mean, don’t they have pictures of the people who are inflicting this nonsense on them? Don’t they know who exactly is responsible? All these protests and processions are meaningless now. It is time to start counting casualties among the elites.

    1. Banger

      Whatever you imagine about pitchforks and riots is just not going to happen for a whole host of reasons. First of all, people crave stability and normalicy. As long as the thieves make their thievery part of the system and the average person can go about his/her business without being assaulted by violent youth or whatever they are happy to pay taxes to the government and taxes to the just plain ole thieves as long as stability reigns.

      If American citizens, for example, had the choice of being ruled by Jamie Dimon or some Occupy hippie they would choose the former in overwhelming numbers because he wears nice suits and has a nice haircut indicating his orderly mind etc. That’s just a fact and there is no way you can get around that. Then, of course there is always the fact that physical violence is just not part of the culture of the average upper-middle class leftist in the U.S. or Europe. And those who are quickly aroused to violence are, generally, not sophisticated enough to know what a “liar’s loan” is or would be even curious about it–they’re more worried about lazy dark-skinned people perpetrating food-stamp fraud and collecting unemployment or whatever the Euro equivalent of that would be.

      So go back to reading Black and take yer medicine.

      1. nonclassical

        true, banger…

        “change” of magnitude necessary has historically (in U.S.) been a matter of failure of all institutions financial…who then after much pain THEY inflicted in first place, agree to “regulation”…

        “austerity” is simply a power play for public assets…bought and paid for on the public dime…

      2. reslez

        If I might be allowed to reiterate Lambert’s opinion on this, which I’m hopefully not distoring, the self-described elites welcome violence because it’s a fight they believe they can win. They understand violence. They love it. Why do you think they militarized the police?

        The parasites use violence as a tool. And once you start down that path they put their propaganda engines to work painting their opponents (peaceful or not) as fightening extremists while they merely try to “restore order” with as much ruthlessness as their billion dollar budgets permit. And a sizeable chunk of the dominated population believes everything they say.

        The problem as Ian Welsh might say is that in a technological society it’s impossible to prevent motivated individuals from creating nasty lethal devices. And the motivated assassin is a problem that has never been solved.

        1. Banger

          Of course none of us in any imaginable configuration can compete with the state in terms of violence. However, let’s be clear here, as a veteran of the anti-war left I know the state used agents to foment violence and thus increase repression. Whether the opposition here uses violence, and that can mean very different things, the left will be accused of being violent and to be terrorists. We have to understand that from the get-go.

          The situation is dire and some call for increased non-violent action (Chris Hedges) blocking the pipeline etc. but that is a sort of violence isn’t it–using force to stop action. We are on slim metaphysical grounds no matter how we look at it. I see two other possibilities: 1) emphasizing cooperatives and economically sustainable communities that can work within the system but be separate; and 2) support all movements that seek to wreck the system–right now that’s the non-authoritarian right and even the Tea Party groups who want to devolve gov’t. The left is making a big mistake not noticing the anti-state sentiment in this country and supporting the system and someone like Obama is a big mistake that will only lead to put many of us in the gulag should stuff hit the fan.

      3. jake chase

        Banger, you are so right. And the whole idea of Bernanke being candid, or Obama being honest and statesmanlike, or this or that cretin in Congress standing up to power, or some white knight putz like Spritzer striking fear into banker hearts, or Liz Warren changing things for the better from her stool in the Senate is just silly. It’s all one fantasy after another. None of these people is real; all are fabrications of public wish fulfillment on the one hand, and stooges for sale to the highest bidder on the other. The last honest man in government at any level may have been Paul Wellstone. I forget what happened to him. Small plane crash?

    2. craazyman

      yeahi wA s wondering about that too, then did some anthropological cultural analytical political economical non-mathematical but systematically veridical research at the local Spanish institute, primarily taking the form of talking to a woman there during my lunch break who’s a Spanish national.

      She said the kids are either leaving or living at home hanging out on Facebook, shopping and partying, living off the books like the politicians.

      I thought “That explains it”. I can remember living like that and thinking “why work?” If you can keep it going somehow, getting juiced up, getting laid and having fun, well, what’s so bad about that?

      YOu may reach a point when you’re 40 and look in the mirror and say “Now what?” But you may not live to 40, so why waste the time you have? hahahahah. OK, that’s not so serious. I suppose the thought is it’ll all work out somehow. If you’re not alone in it, it just might.

  7. Cujo359

    A candid Ben Bernanke would tell Congress and the President that there are still nearly 20 million under- and unemployed people out there, and to stop worrying about largely imaginary numbers like federal government deficits and debts. Oh, wait, that would be me being candid.

  8. Susan the other

    I’d like to hear a candid answer from Bernanke on the following: Why has the stock market gone parabolic and what good does that do? How exactly are price stability and employment even relevant? Hasn’t the effect of QE been basically nothing more than creating vastly many more shareholders, all demanding a return on their investments requiring vastly more productivity which will be done by automation, offshoring and labor elimination? I’m sure Bernanke would say, well car sales are up and housing is coming back, avoid discussing the irrational credit market, and just go on to the next question.

    1. Chauncey Gardiner

      I feel that many respondents here share an implicit assumption that domestic economic growth is the paramount desired policy objective. That assumption rests against a backdrop of a world population in excess of 7 billion, energy and other resource constraints, serious environmental issues and climate change.

      What if the shared assumption is simply not so? What if changing the sizes of the pieces of the pie and maintaining the size of those allocations going forward is instead the real primary policy goal?

      1. Susan the other

        Yes. It should be divided up equally. Between countries. And within those countries it should be divided between rich and poor. And for internationalists, they should be limited in their extraction to a tiny percentage above what they create for the well being of people and the planet. No more free lunch for those guys.

      2. nonclassical

        …exactly, Mr. Sellers…”growth” cannot continue, nor apply to all…cannot continue to be foundation of economy…

  9. Jackrabbit

    Candid Bernanke:

    TBTF and our financialized economy means that the tail wags the dog: the Fed works for the Banks. ‘Extraordinary accommodation’ means fantasy accounting and open season on customers.

    Dodd-Frank is just lipstick on pig. Post-2008 ‘reforms’ have only strengthened the position of TBTF Banks.

    QE to help the unemployed was great political cover for the tax deals (extending the Bush tax cuts, then the ‘fiscal cliff’ compromise) that overwhelmingly favored the wealthy.

    1. Dave

      Ben to Congress.

      Well folks, we tried, and it is not working. And it will never work to the extent that you want, because your expectations are completely unrealistic.

      Manufacturing and even the service sector are declining due to our own cleverness and there is nothing we can do about it even though we tried. Folks need to buy a lot of stuff just to keep others busy, so as you requested, we made it really easy to borrow money. That didn’t work because it was expected that the borrowers repay this money, and they couldn’t because they have lost their jobs and often did not have a good one in the first place. Banks really hate that! We don’t want stuff that nobody else wants, we want money! This makes it necessary for you to compensate us for what you asked us to do.

      Furthermore, the expectations of our entire society are doomed to disappointment. We can make and serve stuff faster than we have ever been able to before, and with fewer employees. We can no longer export as much as we did before since almost everyone else can make their own stuff, and they can make it cheaper too. Also we can not sell as much of our own product domestically because it is expensive, often of lower quality, and we have fewer jobs, often with lower pay, for our folks.

      This is a real dilemma! Since your “solution” has not and never will work, we’ve decided to take care of ourselves the best we can. It has become more difficult to make things at a profit using money to invest in manufacturing and service. (too much of both already) The logical solution then is to make money off money through speculation and the stock market.

      By doing this, we will at least achieve some measure of income equality. The general US standard of living will decline to a level more equal to that of most of the rest of the world. In addition, if we can maintain, the finacial industry and the government and its employees will then have placed ourselves in a position similar to that of the economic elites in many other countries.

      Thank you for your support!

    2. nonclassical

      …had QE not been applied, foreign banks ending up holding all those MBS which QE “bought back” would have had no reason to validate U.S. hegemony=status quo economics-international monetary value of dollar…

      can anyone imagine (more dollars outside U.S. than inside) what would happen to $$$$ value if they were all returned to U.S.????

  10. ambrit

    A candid Ben Bernanke would tell the congresspeople before him; “You trusty humble servants of Wealth are doing well. Keep to the program, toe the line, stay on script, and you shall be rewarded in the Revolving Door World. Not for naught do we labor mightily in the vineyards of the Rich and Famous. Scraps from off the Masters table will fall our way, as it says in the Book of Trickledown. Let the hewers of wood and the drawers of water look to themselves. We are anointed, the chosen among men. I salute you.”

  11. docg

    “A candid Bernanke would tell Congress that there was nothing intrinsically “good” or “bad” about a federal budget deficit or surplus for a nation with a sovereign currency that borrows in its own currency and allows its value to float freely.”

    Yves, I know you’re an economist, and as far as I can tell both an intelligent and an honest one. I understand that you favor MMT, and since I respect you, I respect your thoughts on this topic. There do seem to be some very good arguments behind it, and I appreciate your many blog posts, and those of your colleagues, explaining it and arguing in its favor.

    But I’m sorry, imo we are long past the point where arguments over which economic theory is superior carry much weight with the general public or are likely to settle anything at all regarding the future of our economy or our politics.

    The real problem is not which economic theory is superior, but what is the most meaningful and efficient way to improve both our economy and the lives of those who depend on it. And as I see it, the battle of the theories is a distraction.

    What really counts imo are 1. jobs; 2. inequality.

    So why aren’t more economists like yourself spending more thought and energy arguing for a major jobs program, plain and simple, regardless of how it’s funded. AND serious eduction reform, to get our young people out from under that huge debt load. And since funding such programs via deficits is going to look like an Enron-style gimmick to the general public and politicians alike, regardless of its merits, and since deficit spending does nothing to fight inequality, then why not argue for funding via the re-institution of a genuinely progressive taxation system — including Social Security?

    Seems to me that deficit spending gets the oligarchs off the hook. Taxation hits them where they live.

    1. nonclassical

      …if we are currently in international marketplace, one would be forced to recognize education (Europe=competition) beyond secondary if FREE (4 year university or vocational equivalent)…creating much more highly educated workforce…

      OOOPS…education=comprehension-understanding of “criminogenic accounting fraud”…

      fully educated workforces not applicable in U.S. where “cheap labor force” is GOAL…”THE TRAP”=Adam Curtis:

  12. washunate

    Personally, I would love to hear a candid Bernanke say that he was appointed by the President and confirmed by the Senate and that he no longer wants to carry their water for them.

  13. Jimbo

    Honest Ben:

    “We took your money, and we’re going to keep on taking it. Tough titty if you don’t like it.”

  14. robnume

    I read this post by Bill Black recently on his home blog New Economic Perspectives; my only question is this: What if Bernanke had ANY character at all? Wishful thinking on my part, I know.

  15. ChrisPacific

    If Bernanke was candid:

    “Oh, you want to know what I think the economy will do? Why are you so interested in my opinion?

    Honestly, you guys crack me up. It doesn’t seem to matter how many times I get it wrong, you’ll all still be back in here the next day hanging on my every word. To tell the truth, I’ve just been making shit up for the last few years to see how much I can get you all to swallow. You would think that at some point somebody might think to check on the accuracy of my past predictions and would catch on, but no – no matter how many times I get it wrong, it just never seems to sink in. I mean, for God’s sake, I said in 2006 that there was no housing bubble! I was sure that would be a dead giveaway, but no – years later, there you all still are, all in a row, with your microphones ready, looking so deadly serious. It’s hilarious, it really is. I really don’t think you give a damn whether I know what I’m talking about or not. You just want someone to hold you and tell you everything’s going to be alright.

    OK, you got it. Here goes. The recession will be a distant memory and the economy will go from strength to strength – not that it needs any help since it’s doing great right now (how you guys swallowed that one I’ll never know – honestly, you are unbelievable). Credit will flow like water, everyone will get a free house and a car in the driveway. Oh, and a free pony. Sure, why not.

    Oh, and rates? ZIRP as far as the eye can see, baby! Really, why would we change? The banks are making out like bandits on this stuff. Seriously, they are just minting it. Cha-ching! It’s been our most successful policy ever in terms of meeting the needs of our constituents. What’s that? You thought that was the American public? You’re adorable. I bet you still believe in Santa Claus.”

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