Groveling at the Fed: Greenspan and Bernanke

Federal Reserve Chairman Ben S. Bernanke gave a speech on January 3, 2010 that was incomprehensible. The address itself will be discussed later. It is important first to consider the precedent of Federal Reserve chairmen making absurd claims – and getting away with it.

A place to start is Alan Greenspan’s 2002 speech in Jackson Hole, Wyoming. The then Federal Reserve chairman explained that central banks could not identify bubbles because “only history books and musty archives gave us clues to the appropriate stance for the policy.” There are several problems with this excuse, not to mention his even less credible fiddle-faddle. More important though, is that the chairman’s address was disseminated with very little opposition along channels of communication. Economists cheered or remained silent. With a few notable exceptions, the media reported Greenspan’s speech as if it was a press release, which it was.

More up-to-date is Alan Greenspan’s appearance before Congress in October 2008. He had left the Fed in January 2006. In 2008, he testified about his contribution to the worldwide financial meltdown.

Greenspan was “shocked” to find a “flaw” in his “ideology.” He discussed his model that impugned “40 years or more of considerable evidence.” His model miscalculated the “self-interest of lending institutions” that he believed protected shareholder interests. Greenspan explained his naiveté was the reason he had not regulated banks properly.

Greenspan’s mistake was so often repeated that it acquired an official status. There are (at least) three official bodies that profit from this hallucination. First, the politicians. Since the Federal Reserve is the nation’s leading bank regulator, the politicians who inflated the credit bubble (e.g, through Fannie Mae, Freddie Mac, Countrywide Credit, banks that securitized mortgages, the National Association of Homebuilders) have not been held to account. The politicians are free to toy with petty financial regulation, while Fannie, Freddie and lethal derivatives are compounding as before.

The second body is the Federal Reserve. In a more mature world, after such a display of catastrophic incompetence, the Fed would be disbanded….

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