Ben Bernanke: financial firefighter or arsonist?
Ben Bernanke recently penned an op-ed in the Washington Post sounding the alarm that the powers of the Federal Reserve might be undercut by pending legislation, and thereby undermine its ability to prevent future financial crises.
The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.
In Bernanke’s view of the Fed—the same view that is shared by most narratives of the financial crisis—the Fed was a force for good in minimizing the crisis, which was caused fundamentally by greedy, reckless financiers. The only criticism of the Fed in this narrative, is that it did not use its powers strongly enough. As Bernanke puts it:
The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis.
Thus, the Fed is a financial firefighter that simply needs more resources to put out fires set by financial arsonists in the free market—and Bernanke is Financial Firefighter in Chief.
The Fed is the arsonist. The Fed has command-and-control powers to dictate the money supply and baseline interest rates in our economy—fundamental factors shaping market decisions about where to invest money. As Yaron Brook explains in his thorough course on the financial crisis, the Fed’s artificially low interest rates (under the regime of Alan Greenspan and deputy Ben Bernanke) were the primary cause of the housing bubble, which combined with other government-induced phenomena (such as Fannie Mae and Freddie Mac) effectively paid people to make reckless investments in real estate. Brook explains how similar factors were at work in the dot-com boom.
In other words, the problem is not that government policies and institutions didn’t do enough to stop the fire, it is that they poured the gasoline and lit the matches.