Its an oldie but a goodie for our Federal Reserve chairman. In one of his recent lectures at George Washington University (GWU), Ben S. Bernanke made the self-congratulatory assertion that the forceful policy response led by the Federal Reserve in 2008 helped avoid a more serious economic downturn.
This rhetoric is nothing new. Mr. Bernanke has made similar remarks in the past. As he confided in one interview, I was not going to be the Federal Reserve chairman who presided over the second Great Depression. It is clear that like Treasury Secretary Timothy F. Geithner, who recently trumpeted the fourth anniversary of his role in the Bear Stearns bailout, Mr. Bernanke is aggressively using the GWU lectures to shape his legacy before he steps down.
During the chairmans one-hour-plus lecture, he dedicated five full minutes (and four PowerPoint slides) to a case study on AIG. In the classic dour assessments reminiscent of 2008, Mr. Bernanke used Chicken Little hyperbole, noting that the failure of AIG, in our estimation, would have been basically the end. The chairman did not elaborate for the benefit of the students in attendance what he meant by the end or the precise connection between the failure of AIG and the end of financial life as we know it, but it certainly made for a dramatic moment during the lecture.
Interestingly enough, one of the GWU students pressed the chairman for more details on the decision-making process underlying interventions like what occurred with AIG. The student, identified by Mr. Bernanke as Max, boldly questioned the chairmans methods: Where do you draw the line between bailing out a bank and allowing it to fail? Is it arbitrary or is there some sort of methodology? Mr. Bernanke meandered a bit in responding to Max and eventually admitted that the process was somewhere in between arbitrary and a set methodology, noting that it was a case-by-case process and somewhat ad hoc.
Lets suppose for a moment that Max wasnt satisfied with the chairmans ill-defined response and he decided to do a more in-depth analysis of the Feds bailout of AIG for the semesters final term paper. Surely, there would be an abundance of documents available supporting the Feds approach in the AIG case. After all, if the Feds bailout of AIG really saved us from the end, as Mr. Bernanke called it, the Fed should be all too happy to provide such details, and likely already has released an abundance of them.
We actually brought suit against the Fed nearly two years ago, requesting precisely that type of information. Some of the details revealed the shocking extent of the ad hoc, seat-of-the-pants nature of the analysis just days before the Fed made the AIG bailout decision. Emails produced by the Fed show confusion about basic information concerning AIG. One Fed email in particular says it all: What do you know about AIG? Have you produced memos on them anytime recently?
What we know from the material that was released is damaging enough but more than half of the content of the documents was redacted. We continue to this day to press the Obama administration to release details related to this bailout success story.
In the nearly 100 years since the Feds creation, the deeper the economic downturn, the greater the number of policy missteps by the Federal Reserve and its cohorts in Washington. This was the case in the Great Depression, which was a downturn rife with Fed policy mistakes. Similarly, the most recent downturn, although not as bad as the Great Depression, was quite deep and also involved numerous policy errors by the Fed. Unfortunately, thats not one of the obvious lessons of financial crises that professor Bernanke shared with the GWU students.
Rather than admitting to the arbitrary and capricious nature of the bailouts, Mr. Bernanke would have us believe that he and his band of bureaucrats executed a cogent strategy to pull from the brink of disaster companiesand, indeed, a nationthat were too big to fail. The fact is that they guessed their way through the bailouts and cannot point to any cogent analysis of the costs of inaction.
We know this because we asked. But dont expect these facts to get in the way of Mr. Bernankes fairy tale.