Bernanke: Legend or Fool?

Tuesday, August 25, 2009

Ben S. Bernanke received nomination from President Obama today for his second term to what has become arguably the global economy's most influential office in the world, Chairman of the Federal Reserve. Most public reports have headlined Bernanke's incredible, decisive action in the face of calamity in the financial markets. Bernanke's exceptional responses include cutting short-term borrowing rates to zero, injecting one trillion dollars into the banking system and orchestrating the rescues of Bear Stearns and AIG. Praises adorn him now but how will history remember him?
I think his true test will come in the next several years and we have yet to feel the consequences of his actions. The script could eventually read one of the following two ways:
Bernanke saved the world from economic disaster. He acted with firm resolve and an uncanny knowledge of the necessary steps needed to be taken. Bernanke led the Fed to a historically unprecendented expansion of the monetary base. He then acted swiftly to reverse course as the economy began to heat back up. His courage to raise rates in the face of intense political pressure was impressive. Bernanke proved all the cynics wrong, he saved us from a depression while managing to avoid the once-thought inevitable hyperinflationary pressures that would come along. Bernanke is an economic legend.
Or perhaps...
Helicopter Ben, in all his infinite wisdom, cured a financial panic only to cause one much greater. His unwillingness to reverse the drastic actions taken during 2008 has caused massive hyperinflation and entirely destroyed the value of the US dollar. Now, we are left with stagflation and a Fed that is powerless to stop it. Bernanke, for all his Great Depression studying, actually believed that this country could avoid the ill-effects of a deep recession resulting from reckless leverage. His actions only worked to reinflate a bubble that needed popping. Instead of purging the excesses from our economy, Benanke created more and for that, he is a fool.
Or perhaps it falls in between. Only time will tell how history will remember him. His actions, including a greater than 100% increase in the monetary base, have never been attempted in the past. We have no historical basis for which to judge what he has done. But, I believe he will be forced to make very tough decisions in the next couple years to reign in inflation. Can he do it effectively? Will he do it quickly enough? We will see.


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