Bernanke Must Go

Some years ago (40, to be exact) I attended a rally for then-U.S. Sen. Eugene McCarthy, who was running against Lyndon Johnson for the Democratic nomination for president. “Clean Gene,” as he was called, shared a bit of barnyard humor that has stuck with me ever since. My knowledge of farm animals is pretty limited, so I can’t vouch for whether it’s true on a biological or zoological level.
According to McCarthy, pigs are mostly insensitive to temperature except in their snouts. In Minnesota, where McCarthy was from, it gets pretty cold, of course. But because pigs mainly sense temperature with their snouts, as long as their snouts are warm, they believe they’re warm all over. So when a pig gets cold, McCarthy said, it will try to warm itself up by sticking its snout between the hind legs of another pig.
According to McCarthy, it’s not unheard-of to see whole herds of swine forming a kind of daisy chain, each with its nose up the backside of the one in front of it. And if there’s an unexpected hard freeze, an unfortunate pig farmer might come out the next morning to find his entire herd frozen to death in a circle.
McCarthy shared this somewhat indelicate information as a metaphor for the behavior of politicians, but it also strikes me as highly applicable to the way financial regulators and executives have been behaving lately.
Take, for instance, Federal Reserve Chairman Ben Bernanke. Throughout the first half of this year, Bernanke insisted that the U.S. economy was not in a recession and stood a fair chance of avoiding one. While he acknowledged that the economy was weak and the financial system vulnerable because of mortgage-related problems, he expressed confidence that the Fed’s cuts in its key interest rate would be enough to prevent an actual economic decline.
We know now, of course, that Bernanke was wrong. According to the National Bureau of Economic Research, a private nonprofit business group that is the quasi-official authority on economic cycles, the U.S. entered a recession a year ago this month.
What’s more, a lot of people have known that all along; even an armchair economist like me. Back on April 23, I wrote in my blog for The Post and Courier that “it would appear likely that we’ll look back at the fourth quarter of 2007 as the beginning of this recession.”
But Bernanke – who holds his job as Fed chairman because he’s regarded as one of the nation’s top economists – continued to insist that there was no recession and that a recession could, in fact, be avoided.
There are only two possible reasons why Bernanke kept saying those things: Either he’s an incompetent economist or he was being deliberately deceptive.
I’d probably opt for the latter explanation, because there does seem to be a kind of traditional belief in the financial community that denial of negative conditions will somehow make those conditions go away. (The real estate community took a somewhat similar approach early in the ongoing collapse of that market.) And there’s also the Straussian belief, widespread in the Bush administration, that deception of the citizenry is a valid policy tool.
However, it doesn’t matter which explanation you prefer. Either way, it’s clear that we have no good reason to trust Bernanke as a steward of our economy and financial system.
Bernanke’s partner in the ongoing economic Tweedledum and Tweedledee act, Henry Paulson, will be leaving office in January as part of the turnover of the White House to Barack Obama’s team. But Bernanke’s 4-year term as chairman of the Fed doesn’t expire until January 2010, and his 14-year (!) term on the Fed’s board will last until 2020.
The totally inadequate response of Bernanke and Paulson to the current economic and financial problems is reason enough to want them both gone. But now that we have clear, decisive evidence of Bernanke’s unreliability even on the level of Economics 101, it’s imperative that he be replaced as rapidly as possible.
Bernanke should do the honorable thing and resign, now. And if he won’t do that, then the new administration and the new Congress should do whatever is necessary to dismiss him for incompetence. All he has done is try to keep financial executives’ noses warm, but the economic temperature is still dropping.