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Bernanke on 60 Minutes

Sunday, March 15, 2009
Keywords: Economics

The Ben Bernanke interview on 60 Minutes tonight was enjoyable, in part because it's one of those rare instances where the media coverage of the current crisis is actually accurate and decent. There were four points in particular that I found delightful.

First, in a very subtle and coded way, he said that he was opposed to letting Lehman go, and that the fault for that lay with Hank Paulson. He did this by noting that the Fed did not act because the Fed did not have the power to act, the subtle implication of which was that the ball was in Treasury's court (for the dissolution of Bear Stearns, the Fed had a very ad hoc approach that involved acting through an intermediary). Many have attributed the Lehman misjudgment to Paulson's ideology, and it's comforting to know that at least the Fed was on the right track.

Second, Bernanke spoke of the need to stabilize and recapitalize the financial system as a prerequisite for recovery. This is a point that far too many people, especially those in the media, miss. It's reassuring to know that the Fed Chairman recognizes the importance of this, especially given how pitiful the Obama administration's plans on this front have been (I suspect in part due to political considerations, as Republicans seem to be even more blind to this).

Third, Bernanke spoke of the need to grant the Fed more powers, and he also spoke of the need for an easier way for the government to "wind down" financial institutions. Although Bernanke does not say this in the interview, the Fed, being an independent institution immune to political bickering, has done the most in this crisis, often finding creative ways to step beyond its normal boundaries. When this history of this crisis is written years down the road, I doubt many will find fault with the Fed's response. But it still has its limits: it did not have the authority to stop Lehman's collapse, for example. And asking for an easier way to "wind down" bad institutions is just a subtle way of saying, "in the future, we need a way to temporarily 'nationalize' and clean up institutions without having to subject the economy to the uninformed and idiotic bickering of politics"--basically, to expand the ability to do FDIC-like interventions.

Finally, when asked about the causes of this, Bernanke homed in on what I have long thought to be the true root cause of the crisis: a savings glut. Too many people focus on the housing bubble, on derivatives, on Wall Street greed, etc. But while all of these things are relevant and have contributed to the formation of the crisis, they are not the root causes. The problem, as Bernanke puts it, is the massive inflow of capital ("savings") from "China, East Asia, and oil-producing countries" over the past decade or so. An excess of capital without a good place to go is how we form bubbles. This is what happened with the stock market bubble of the 1920's, with Japan's real estate bubble of the 1980's, and with the global real estate asset bubble. If we had tougher mortgage regulations and better bankers, we may have avoided a mortgage bubble, but with all that capital sloshing around, if it wasn't going to be a mortgage bubble, it would have been some other bubble that would have formed and bust, which is why I put the primary blame on the savings glut.

Not only is this one of those extremely rare situations where the large capital inflow is mentioned in the media, it's also a rare situation where China is singled out by name. If there is any single entity that deserves the most blame, it would be China. Normally, when there is a trade imbalance, the exporting country's currency will appreciate in value, making it cheaper for them to import and more expensive for them to export, and this is the market's way of naturally correcting trade imbalances. But the Chinese government manipulates its currency by sending Dollars back to the US (and Euros back to Europe). This keeps the RMB undervalued (which, BTW, hurts the average Chinese citizen) and ensures that Chinese exports are artificially cheap, thus sustaining the trade imbalance. One devastating side effect of this is that by trying to hold down the RMB and prop up the Dollar and Euro, China was also helping create an imbalance of capital flows, which is the cause of the excess bubble-forming savings that flooded Europe and the US. Of course, China was not the only country at fault, but it was probably the biggest. I can only hope that when this is all over, the West will take a harder stance on China's undervalued currency (by the IMF's purchasing power parity estimates, the RMB is nominally valued at half of its true value).

Edit: Fixed link... again.

This entry was edited on 2009/03/15 at 23:05:42 GMT -0400.

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