Stop. Take a deep breath. Don’t flip out over the title. Yet.
It is important to know that Bernanke’s praise of Hitler was qualified and narrow. So please allow me to make one important clarification: Bernanke strictly praised Hitler’s understanding of economics, nothing more. However, his praise for Hitler’s understanding of macroeconomics and his economic policies is unabashed.
Whew! Hopefully, now that a firestorm of blind rage has been avoided or at least minimized, let’s look at some of the transcript from Bernanke’s interview on the Freakonomics Radio Podcast, analyze some of his statements, and hopefully gain a better understanding of how Bernanke’s policies have done nothing to solve problems inherent in operation of central banks.
Before we do that, I feel the need to make a point.
Those of you who frequently read our work here at Lions of Liberty and listen to our podcasts – which will be expanding to 3 shows per week starting next week with the addition of my own Felony Friday Podcast! – know that we love making podcasts. It truly is a labor of love. Both metaphorically and literally, because we make no money by doing this, yet.
We would love podcasting even if it wasn’t a rapidly expanding industry, but the growth and mainstream acceptance of the podcast format makes podcasting at this time in history even more exciting. Freakonomics Radio is a big deal in the podcast world. They have an NPRish sound and are produced by WNYC, which is a public radio station. However, the fact that a podcast, any podcast, was able to land an interview with the former Chairman of the Federal Reserve – arguably at one time the most powerful man in the world – makes the future prospects of podcasting even more exciting.
Ok. I feel better now that I’ve gotten that off my chest. The quoted section below follows a line of questioning by host Stephen Dubner asking Bernanke about the Great Depression. Dubner and Bernanke discuss what could have been done to avoid or mitigate the damage of the Great Depression and FDR’s decision to take the United States off the gold standard. In order to keep Bernanke’s comments in context I am including preceding questions that lead up to Bernanke’s endorsement of Hitler’s economic policies. Let’s take a look at what Ben Bernanke had to say about Hitler on the Freakonomics Radio Podcast (emphasis mine):
DUBNER: So FDR is the hero, really, in your telling of the Depression. He tried several what you call experiments, and that “collectively they worked,” you write. Now, how universally accepted is that argument among economists? To my understanding it’s not universally accepted, correct?
BERNANKE: Well, I think a couple things he did that were clearly helpful. The first one was going off the gold standard, allowing the money supply to grow. The second was putting in deposit insurance which brought the bank runs, the banking panics, to an end. And I think that those two things — I think almost any economist, particularly those who have studied the Depression would agree that those were very important, positive steps to stopping the collapse. Now, you could argue that more could have been done to help after 1934 when you saw a lot of recovery; the recovery from 1934 to ‘41 was actually somewhat halting and included a new recession in 1937-38. And critics could argue, for example — just to make two points — one would be that he didn’t do enough with fiscal policy, that he still had a balanced-budget mentality (he campaigned on a balanced-budget platform when he ran for president) — that there wasn’t enough done on the fiscal side. The other potential concern was that he took some actions that were probably counterproductive. So, one example would be the National Recovery Act, which actually put floors under prices which was a kind of awkward way to try to stop the deflation. But I think most research today would suggest that that was actually pretty counterproductive.
DUBNER: And what about taxation? What could he have done differently?
BERNANKE: I suppose he could have cut taxes, but taxes weren’t as high then as they are now. The general recollection people have, or the vision they have of the ‘30s, was that the government employment programs like the WPA and the building of the Hoover Dam and things like that were a big deal. And they were important, but relative to the size of the problem they were actually quite small. And as early as the 1950s, economists pointed out that the fiscal programs of the ’30s were actually very modest compared to the size of the problem. Ironically — and please take this the right way — the person who sort of most understood fiscal policy, in some sense, was Adolf Hitler. Because the rearming of Germany in the ’30s was so big and so extensive — of course, he had other objectives in mind — but the side effect of that re-arming, together with a big highway building program, was such that Germany, which had a very deep depression, actually came out of it much quicker than other countries, and suggested that a more aggressive fiscal program would have helped the United States as well. And of course, what ultimately brought the United States out of the Great Depression was World War II which was, unintentionally, a huge fiscal program.
Bernanke believes that if FDR enacted fiscal policy similar to Hitler in Germany in the 1930s that the United States would have come out of the depression much more quickly. Obviously, Bernanke does not endorse how Hitler spent the money or his objectives, but he claims that aggressive fiscal expenditures by Germany brought the country out of the depression more quickly than other nations.
Although Bernanke’s statement is a little more shocking due to his praise of Hitler’s fiscal acumen, the general belief that more government spending stimulates economic growth is widely held by most mainstream economists. This thought process can be traced to John Maynard Keynes, the grandfather of the school of thought known today as Keynesian economics.
Before I explain the problems associated with pursuing a policy of large government expenditures in infrastructure projects as a means to resuscitate the economy of a nation suffering through a recession or depression; I want jump to another portion of Bernanke’s interview on the Freakonomics Radio Podcast.
It is during this segment where we gain an understanding of Bernanke’s underlying philosophy regarding the role the Federal Reserve and government regulation should play with regards to “running” the economy. This exchange is a great back and forth where host Stephen Dubner presses Bernanke on the belief that the Federal Reserve plays some role in creating a climate where systematic opportunities are created for risks to be taken, absorbed, or passed on that would not be possible without the Federal Reserve’s actions.
DUBNER: No, of course not. But, like you just said, the incentives become present for more risk-taking. And at the end of the day, everything you’ve described in the conversation today makes it sound as though the crisis kind of snuck up on everybody because there were systemic opportunities for people to take on that risk — to absorb the risk, or really to pass on the risk. So wasn’t that, in some ways, a product of the Great Moderation and the monetary policy that helped induce the Great Moderation. In other words, so easy for anyone to borrow anything for any purpose, and so on, that really — isn’t that what snowballed to some degree?
BERNANKE: Again, I don’t think that’s the right way to think about it. The way I think about this is, you’ve got two tools: you got monetary policy, and you got bank regulation. The job of monetary policy is to try to help the economy stable. The job of regulation and supervision is to be the first line of defense against excessive risk-taking and those kinds of problems building up in the financial system. So you got to use the right tool for the job. You use monetary policy for economic stabilization; and supervision, regulation, and other related policies — more targeted policies — to address financial-stability concerns. So, what I would argue is that, while it may have been the case that one of the factors that supported more risk-taking was the stability of the economy overall — which, in some sense, ironically was, in fact, a result of successful monetary policy — that the true policy-failing leading up to the great crisis was the regulatory and supervisory side, that we didn’t — and now I’m talking about the regulatory community in general — didn’t fully appreciate the risks that were building up, nor did the banks themselves. And they weren’t tough enough about preventing them. And so, I think that today, for example, I think monetary policy is still good and is working to help keep our economy growing and keep inflation low. But what we’ve done is we’ve greatly strengthened the regulatory system. That’s the right tool. So if you ask the question, you know, “What should have been done different?” I don’t think you should’ve had bad monetary policy to keep the situation unstable so that people wouldn’t take risks. I think that’s crazy. I think the right thing to have done would have been to have much stronger regulatory policy, and that’s the right tool to focus on that particular problem.
It really is amazing that a man as highly educated as Ben Bernanke can hold such simplistic views regarding economic theory. Defenders of the status quo will claim that the Federal Reserve uses complex economic modeling to try to maintain the proper money supply (and they would be right), but the underlying belief that money supply creates prosperity is so basic it borders on being childish. This backwards logic leads to Bernanke’s praise for both Hitler and FDR for their monetary policy. To Ben Bernanke it is as simple as making sure there’s enough money to be spent by the government and that the government actively takes on projects to spend this money.
The global economy is complex beyond comprehension. Yet Bernanke and his Keynesian cohorts believe the only fuel needed to keep the economy humming is an adequate money supply and the proper government regulation in the right areas. This sort of policy can work in the short-term, but it is only a matter of time until the bubble created by misallocation of wealth resulting from loose Federal Reserve monetary policy goes bust.
Government regulations are too reactive in nature to sufficiently counteract the tremendous risk appetite introduced by loose Fed monetary policy. Think of all the novice real estate investors who jumped into the market during the run up to the 2008 crash. They were able to buy houses by putting no money down with the expectation that the price would go up forever. And who was left holding the bag for those malinvestments?
The American people of course. They were put on the hook to bail out the banks who made these inexcusable loans. Bernanke would claim that there were not sufficient government regulations in place to counteract the risk. He says this while admitting that he didn’t understand the absolute economic devastation and cost impacts that would come to fruition as a result of a crash in the housing market.
So how is the government supposed to put policies in place to regulate banks if the Fed, who is responsible for creating an environment conducive to economic growth, doesn’t understand the scope of the damage the banking industry is liable to cause?
They can’t. This is one of the fundamental problems with Keynesian economics. And even if it were possible to maintain stability in the U.S. and global economy using this prescription, who’s to say it’s moral for a government sanctioned institution to determine interest rates, money supply, and which banks are too big to fail?
In a more free society the market would be the regulating force and would determine monetary “policy.” This means that bad investments would not be bailed out by central banking cartels and interest rates would be set by the market. This would ensure that measures would be naturally built into the economy to warn investors of risky endeavors and prevent the perpetual boom and bust cycles we’ve to which we’ve grown accustomed.
In this more free society, the role of governance in the industry would be limited to prosecuting fraud. This runs in direct opposition to how the Fed operates today.
Please check out the entire Freakonomics Radio Podcast with Ben Bernanke.
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