Our 2009 Christopher Columbus Prize
Beginning a new tradition, we give an award to the person who has done the dumbest thing in the financial world during the preceding 12 months. We call it the “Christopher Columbus Prize,” named after the mariner who didn’t know where he was going, didn’t know where he was when he got there, and as Churchill pointed out, did it all at government expense.
Anyone can make a mistake. But to make a truly colossal blunder you need the support of the taxpayer. That’s why TIME magazine named Ben Bernanke its “Man of the Year.” Yes, you guessed it, he is our man too.
A decent economist is rarely offered the job of Fed chairman. The public wants miracles. A real economist knows he can’t deliver them, so he takes himself out of the running before embarrassing anyone. A scoundrel like Alan Greenspan, on the other hand, squeezes his role like a ham actor, even though he knows the juice is bogus.
But in order to understand the grandeur of Bernanke’s error in 2009 we have to go back to the Greenspan era…and his illusions of 2004. He had no idea of where he was then, as evidenced by a famous speech made to the Eastern Economics Association, entitled “the Great Moderation.” The Fed’s future chairman described recent history, in which nothing much went wrong. He attributed this remarkable stretch of growth and stability to “improved policymaking,” noting that the stability should continue indefinitely, “assuming of course that policymakers do not forget the lessons of history.”
But the professor from Princeton never learned the lessons of history in the first place – not even the recent history of Japan. The real cause of the “moderation” was a huge flood of credit in the ’90s and ’00s. No one disputes it. That’s why everybody looked so smart. Even a captain who wanted to run his bark aground would have had a hard time finding rocks; they were submerged under EZ money – much of it from the Fed. Investors thought they were geniuses because their assets rose in price. Businessmen were heroes because sales increased. And the Fed chairman took excess credit for what excess credit itself had wrought. But that was just like Ben Bernanke, he mistook a dangerous nuisance for a great success.
Then, in 2009, having misunderstood where he came from and how he got there, it was not surprising that he had no idea where he was. As Bernanke saw it, credit was what made the world spin. Now, with gears stiffening, it needed more grease. But where would the money come from? The US government already had a net worth of minus $68 trillion; it could only spend by borrowing more. Any moron could see the problem right there. In order to put a dollar in the economy, the feds first had to take it out, which further damaged the credit of the world’s biggest debtor.
Team Bernanke was counting on “the multiplier effect,” in which spending by the government is supposedly magnified by the private economy. But if he had learned anything from history, it should have been that the magnifier doesn’t work when an economy is de-leveraging. David Ricardo explained why more than 100 years ago: as the government borrows more and more, people begin to suspect a crisis is coming. Rather than spend or invest, they hunker down and wait. Instead of multiplying the government’s inputs, the private sector gives them a haircut.
The amounts are staggering. In 2010, the US federal government will have to roll over 2.5 trillion in debt and finance an additional deficit that will probably reach up to another trillion. Where will it get that kind of money?
Don’t look at us, said Bank of China honcho Zhu Min last week: “The United States cannot force foreign governments to increase their holdings of Treasuries… The world does not have so much money to buy more US Treasuries.”
Where he was maladroit with fiscal policy, he stumbled badly on monetary policy too. Intending to re-liquefy the economy, Ben Bernanke turned on a fire-hose. But the banks hunkered down, just like consumers. Measures of the real money supply turned negative. The Fed stopped reporting M3 – the traditional money supply measure – in March 2006. But it has been contracting month after month since July. We don’t have December numbers yet, but it appears likely to drop below the zero line…meaning not just a decline in the rate of an increase, but an actual decrease in the available money supply. As the supply of money falls, the value of each dollar goes up. People owe more…and spend less. That is what a depression is all about.
Economist Richard Koo:
“Now the same Mr. Bernanke is finding himself, in the United States, that even with all the actions of the Federal Reserve, nothing is happening. So he is in the same position the Bank of Japan was in 15 years ago.”
Now we see where the mariner has washed up – just where he didn’t want to go. In Japan.