Requiem for Ben Bernanke and his Second "Great Depression"

“I was not going to be the Federal Reserve chairman who presided over the second Great Depression,” declared Federal Reserve Chairman Ben Bernanke this past Sunday. Well, he sure had me fooled.

My gut reaction to Mr. Bernanke’s statement was to recall the famous words of former President Nixon, who said of the Vietnam conflict, “I’m not going to be the first American president to lose a war.” And we know how that turned out.

Poor Mr. Bernanke. Does he really not understand his fate? I’ll grant that he was dealt a bad hand – a draw of pure, malevolent evil – by his incompetent predecessor at the Fed, Alan Greenspan. But when you volunteer to run the nation’s central bank, you’re asking for a seat at the table of history. When history deals, you play the cards that you’re dealt. And sometimes history holds all the trumps, if not a few aces up its sleeve.

This past weekend Mr. Bernanke “appeared stoic at times,” according to The Wall Street Journal, as he met with 190 people in a town hall-style forum at the Federal Reserve Bank of Kansas City. Over the course of an hour, at an event moderated by PBS correspondent Jim Lehrer, the Fed chairman answered 20 questions from attendees.

The unusual setting allowed the former Princeton professor to speak outside of his usual comfort zone. The give-and-take in Missouri – aka “flyover country” to many Washingtonians – was far removed from Fed chief’s normal, well-scripted congressional testimony, or his occasional academic presentations to roomfuls of big shot bankers and professional economists.

Continuing the Nixonian theme, the Kansas City forum was an opportunity to find out what Mr. Bernanke knew, and when did he know it.

Mr. Bernanke defended himself and the Fed against suggestions that he was too eager to aid large financial institutions last fall and winter, while sacrificing the interests of small businesses and everyday American citizens. “It wasn’t to help the big firms that we intervened,” argued Mr. Bernanke as he discussed intervening to help the big firms – y’know, the financial firms that are supposedly too big to fail.

Using a Discovery Channel analogy, Mr. Bernanke said, “When the elephant falls down, all the grass gets crushed as well.” Thus did he justify unprecedented levels of federal aid to the very Wall Street banking houses that contributed so mightily to the bubble economy of recent years. In essence, the Fed had to feed the beast and save the big guys to protect the little guys. But have the little guys really benefited?

Mr. Bernanke claimed that he was “disgusted” by circumstances under which the Fed rode to the rescue of several large financial firms. “Nothing made me more frustrated,” he said, “more angry, than having to intervene” when big banks were “taking wild bets that had forced these companies close to bankruptcy.”

Then Mr. Bernanke argued – strangely – in favor of new laws to let financial firms other than banks fail WITHOUT going into bankruptcy. Huh? What’s wrong with bankruptcy? It’s been around since the days of the Roman Empire.

I practiced bankruptcy law in my pre-Agora career as an attorney. (I’m a recovering attorney now.) I don’t understand Mr. Bernanke’s viewpoint at all. Why shouldn’t big financial firms go bankrupt when they deserve it? OK, there’s the usual canard: because it would be difficult or impossible for a bankruptcy court to “unwind” all the open trades in the sweatshops and boiler rooms of big outfits like AIG. I disagree.

Mr. Bernanke’s comment makes me wonder how well he understands the intent (let alone the history and legal process) of bankruptcy. Or does the Fed boss just always default to handing out special deals to the big-money guys?

Still, I have to give Mr. Bernanke credit for showing up to speak with a couple hundred informed citizens. The Fed certainly deserves the exposure.

According to a recent Gallup poll, a mere 30% of Americans believe that the Fed is doing a “good” or “excellent” job (down from 53% as recently as 2003). About 57% of Americans believe the Fed is doing a “fair” or “poor” job.

Indeed, according to Gallup, the Fed is the least-trusted of nine government agencies. The Fed lags far behind on a list that includes agencies such as NASA and the FBI, as well as traditional bête noires such as the Central Intelligence Agency, the Internal Revenue Agency and the Food and Drug Administration.

Mr. Bernanke’s tenure at the US central bank faces intense scrutiny, and not just from the serial bashing that he receives from the writers at Agora Financial. He has only six months left in his term as Fed chairman. Mr. Bernanke will soon learn whether President Obama will reappoint him to another four-year term or replace him with another Fed chairman wannabe.

Does Mr. Bernanke really want to continue at the Fed? Why? If Mr. Bernanke doesn’t want to preside “over the second Great Depression,” as he claims, then he should get the hell out now and try to salvage some measure of his professional reputation – if not his old job and paycheck at Princeton. Or does Mr. Bernanke want to continue on the pathway of becoming the central bank equivalent of Gen. William Westmoreland?

The questioners in Kansas City were on the right track. They certainly raised better issues than we see in the softball questions Mr. Bernanke routinely receives from members of Congress and senators.

Here’s the key point. Mr. Bernanke and the Fed had a clear policy choice last fall. They could do a big bailout or not. The Fed chose to open Door No. 1 and bail out Wall Street. This was at the expense of Main Street, let alone the national balance sheet.

But the “Second Great Depression” was not going to be stopped so easily. You don’t just throw money at a Great Depression, especially money that you don’t have. Mr. Bernanke ought to know this, based on his studies of the first Great Depression.

Instead of the bailout last fall, Mr. Bernanke and the Fed should’ve let the big guys fail. The Fed should’ve upset the whole stinking mess on the card table and reset the US monetary system. The Fed had the chance to make a statement and choose a new path, and to cast the money-changers out of the temple, so to speak.

Mr. Bernanke and the Fed should’ve allowed the failed banks to go down. The Fed should’ve sent the bubble perps down the street to the US Bankruptcy Court in lower Manhattan, along with all their fraudulent paper such as MBSs, CDOs, SIVs, etc.

Would large-scale bankruptcies have been a shock to the US and world financial system? Of course. That’s the idea. It would have been very ugly. But it would’ve helped to clean up the US economy for a couple of generations.

Would Mr. Bernanke be despised by many people? Yep. Burned in effigy, a la Paul Volker? Yes, and it comes with the job. The Fed chairman should not try to be Mr. Popularity.

By now, almost a year later, we’d have some semblance of financial finality. That’s because bankruptcy courts have the legal power to void bad contracts and discharge unpayable debt. Instead, we still have the problem of bailed-out zombie banks with massive levels of unmarketable paper and unpayable debt on their books. Right now, the “dead banks walking” are doing little but sucking capital out of the system while the Fed tries to reinflate more bubbles.

Would finance and commerce have proceeded during a banking bankruptcy? Yes, because there’s an entire economy out there, with hundreds of millions of people expressing needs and wants in the marketplace. If you believe in the basic idea of Capitalism, then you have to believe that we would have adapted, and learned new ways to meet the needs and wants absent the big, failed banks.

And it’s worth pointing out that plenty of people and companies do business while they’re in bankruptcy court. There’s nothing quite like the stroke of the pen of a federal judge to cut through the crap.

When Ben Bernanke says that he doesn’t want to preside over the second Great Depression, he’s missed a critical point. He’s already there.

Whether it was Pres. Nixon and his policies, mired in the rice paddies in Southeast Asia many decades past, or the current fever-swamps of the Potomac River, there are some bullets that have your name on them. You can’t duck and dodge.

Right now, many years of monetary malpractice are roiling the American economy. To quote a famous Chicago preacher, “The chickens have come home to roost.” The second Great Depression is happening, and it’s happening on Mr. Bernanke’s watch. Did he really expect to skate through a couple of terms as post-Greenspan Fed chairman and not get blown up?

Sad to say, Mr. Bernanke bailed out the big banks. Now the damage is done. We’re still in for that “Second Great Depression.” And Mr. Bernanke will forever be associated with it.

Ben Bernanke could have been a heroic figure. He could have refused the bailout and repudiated several generations of bad monetary ideas. He could have launched a new movement – something like monetary perestroika in the US – and moved the country ahead into a future of increased productivity and financial solvency. Instead, Mr. Bernanke is just a bit actor in a historical tragedy.

There’s no armor against the arrows of fate. Mr. Bernanke has lost his chance. Perhaps he can take solace in the words of Robert Louis Stevenson from his classic “Requiem”: “Home is the sailor, home from the sea.”

That’s all for now. Thanks for reading…

Byron W. King

for The Daily Reckoning