It’s not my fault, says Bernanke

Well, actually, yes it is. The economic establishment is floundering, trying to work out what went wrong. They are, I’m afraid, clueless in their Keynesian beliefs. This is from The Oz: Ben Bernanke: ‘Lack of stimulus to blame for rates’. But before we turn further to Dr Bernanke, let me just draw your attention to a recent article about the success of the “austerity” program in the UK, written by Niall Ferguson:

Long before the United Kingdom’s recent general election, which the Conservatives won by a margin that stunned their critics, the facts about the country’s economic performance had indeed changed. Yet there is no sign of today’s Keynesians changing their minds.

With these thoughts in mind, let us turn to the views of the previous Chairman of the Fed.

The most influential central banker in a generation, who guided the global economy through the biggest financial crisis since the Great Depression, has pinned the blame on governments for the ultra-low interest rates that are playing havoc with exchange rates, asset prices and incomes around the world.

In sweeping and optimistic ­remarks about the economy, made in Sydney yesterday, former US Federal Reserve chairman Ben Bernanke said central banks had been compelled to slash interest rate to unprecedented low levels because governments had dragged their feet in providing essenti­al stimulus measures.

This is all after-the-fact. Now that they are actually witnessing the wreckage that has befallen the world’s economies, and in particular the United States, they are looking for reasons why their policies didn’t bring the recovery they said it would. Bernanke, like Krugman, are mystified. They really have no idea why things have unfolded as they have. Bernanke who made such a fetish of having done so much scholarly work on the Great Depression to work out what to do this time round, finds that whatever he thought he knew, whatever it was he did, that the sum total of their efforts have been a disaster.

I have been teaching the devastating consequences of low interest rates since the start of the GFC. All in the second edition if you are interested. But any economist who believes that an economy can be resurrected from the demand side is a danger to any economy they provide advice to. So here is Bernanke’s latest prediction:

“Some slowing in China is both inevitable and probably ­desirable … (but) a hard landing is not a high probability at all,” he said

Given his track record, if that doesn’t make you worry, I don’t know what would.

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39 Responses to It’s not my fault, says Bernanke

  1. I might actually have a smidgeon of respect for these idiots if they just, for once, said “we were wrong” instead of constantly trying to find pathetic excuses and saying “oh, it was somoeone else ruining our great plan.”

  2. Bruce of Newcastle

    Bernanke is quite complicit.

    The problem with “Keynesian” monetary policy is twofold:

    1. Politicians seize on it as a juicy way to avoid microeconomic reform: eg removal of red and green tape, taxes and making business easier
    2. Politicians only ever actually execute the stimulus aspect of Keynesian policy – they never in the good times reverse this as Keynes said must be done. So rather than being neutral over the business cycle it always is splash in the bad times then find excuses not to repay the debt in the good times.

    So even if Bernanke’s approach did work (which it doesn’t) the political class don’t ever practice it as it is supposed to be done.

    The Reserve Bank a week or so ago said that businesses should lower their hurdle rates for investment. They aren’t.

    Business refusal to invest weighs down economy

    Mr Stevens has expressed frustration that companies have failed to respond to lower interest rates by lowering their “hurdle rates” for expected profits on investment.

    The headline in the AFR is dishonest: the reason that firms don’t reduce hurdle rates because the sovereign risk is rising as the interest rate is falling. Sov risk is added to the hurdle rate calc like a top-up of the interest rate. Also the companies’ actual cost of capital isn’t linked to the RB rate, but to the corporate bond rate and the interest rate that the banks charge on loans to business: which is going up not down, in response to APRA requiring the banks to avoid risky corporate lending.

    The reason why sovereign risk is rising is that politicians are layering on ever growing piles of bureaucratic crap. Think of the CSG projects as an example, subject to the whim of whatever government whether they go or get stopped. How do you account for that in your board approval process: you increase the sov risk setting in your financials.

    Additionally with poor growth, worse unemployment etc the companies can’t find business cases which are good enough to exceed the hurdle rate. So even with low interest on loans they won’t invest.

    This atherosclerosis of the business environment is not going to go away. And Bernanke has been giving the pollies a perfect excuse to avoid doing anything except helicoptering money.

  3. Lem

    They won’t be happy until they have taken everyone down.

    Instead of keeping interest rates up and rewarding the prudence of the vast majority of small people who squirrel something away to see themselves through the lean times (that old fashioned notion of self reliance), they have positively encouraged people to place themselves at great risk by taking on more “investment” debt that is fueling the property and stock market bubble, that must burst and leave who knows how many bankrupts that will then have their hands out for welfare.

    Dumb and dumber.

  4. H B Bear

    Helicopter Ben joins “Inflate ’em” Al Greenspan looking at life in the rear view mirror.

    No sign of anyone learning anything here.

  5. Old School Conservative

    I note that all the pro-Keynesian advice comes from people who have already secured their own wealth and future. Senior public servants, university lecturers, well paid politicians, top executives, and so on.
    There is so much gaming of the Keynesian system that an entrepreneurial and small business driven economy built on savings and investment poses too much personal risk to ever get properly off the ground.

  6. Infidel Tiger

    What a great job.

    No care, no responsibility, no idea. Massive salary.

  7. H B Bear

    Mr Stevens has expressed frustration that companies have failed to respond to lower interest rates by lowering their “hurdle rates” for expected profits on investment.

    Stevens and the rest of the RBA and Treasury egg heads should be made to go and do a week in an actual business like Abbott does with the aboriginal camps – pulling beers, making pizzas, digging ditches the whole lot. Deal with the regulatory bullshit, hopeless IR rules and everything else and pocket whatever is left after a weeks trading instead of a taxpayer funded RBA bank transfer every fortnight.

  8. Tim Neilson

    What we need is a plan that combines the “stimulus” fetish with parochial protectionism and pseudo-environmentalism. Here’s mine.
    We could reintroduce Guy Fawkes Night. All the spending on firewood, crackers and fire starters would stimulate the economy.
    However, most firecrackers would be imported, and we need to favour local industry, so we can forget that – we’ll just have a giant fire festival with no crackers.
    Thus we’d get all the benefits of stimulus without engaging in the evils of free trade with other countries.
    But we can’t burn wood because that would mean killing trees.
    So we’ll revert to paper banknotes, print a few hundred trillion, hand them out to everyone as “stimulus”, and encourage them to burn all banknotes in huge piles. None of the swampies will ever stop to think that paper originates from wood, and as we all know, as long as you ignore reality there can’t be any bad effects from it. And it will still count as “spending” because we’re still getting rid of money on consumption.
    Let me know when the Nobel Prize committee want my delivery details.

  9. Makka

    “I note that all the pro-Keynesian advice comes from people who have already secured their own wealth and future. Senior public servants, university lecturers, well paid politicians, top executives, and so on.”

    Well said.

    Keynesianism is a gravy train, pure and simple, for those with access to the Trough. For those of us who have to fill the trough with work and confiscated taxes to feed the filthy pigs, Keynesianism is a cancer eating our wealth away. This of course is why the EU is so addicted to their Socialist futures. They have their Keynesian licence. In Australia it is little different.

  10. Nicholas (Self-Sovereignty) Gray

    I read something that might kick-start Australia’s economy. In the Business part of ‘The Australian’, I read a report about a new material being used to make super-capacitors, far more powerful than lithium-ion batteries! SER (Strategic Energy Resources) is the company to watch.
    This would also make my earlier ideas about hot-air dirigibles seem almost inevitable! And it seems all good news for Australia, since the ideas were developed here!

  11. Snoopy

    Brilliant UQ economist, Ralph Wiggum, is yet to comment.

  12. Ubique

    Steve, Say’s Law and your Quadrant Online paper scores a mention in the comments on the Oz article on Bernanke’s “lack of stimulus” nonsense.

  13. David

    I’ve just placed an order for the 2nd edition of Steve Kates book.

  14. goatjam

    So like every other socialist/Keynesian who came before him, his explanation for the utter failure of his disastrous policies is that there were not enough of them.

  15. mundi

    So let me get this straight, he is blaming low interest rates on the governments not spending enough ‘stimulus’. What does he define stimulus as? Clearly it is not government expenditure….

  16. Bruce of Newcastle

    I read a report about a new material being used to make super-capacitors, far more powerful than lithium-ion batteries!

    Nicholas – The tank of petrol in your car has roughly ten times the energy density of the best Li battery on the planet.

    Think about it.

  17. Nicholas (Self-Sovereignty) Gray

    And these super-capacitors far exceed batteries! They can be re-charged without losing their capacity to hold a charge, unlike batteries! I think we will soon see solar-powered hot-air airships, with black solar panels covering the balloon’s body, staying in the air 24 hours per day, for many days! Whilst the large size of such aircraft might be a drawback, the freedom from airports would free the industry up! You could park on any flat surface (such as a lake), and let the air out, and then reseal the bags when you wanted to rise! No expensive gas needed for rising! And most of your journey could be above the clouds, so clouds wouldn’t interfere with the panels.

  18. mundi

    Forget the argument over Keynesianism, we can’t even win the argument over what is actually stimulus.

    People till claim NBN and RET are stimulus. Even if you accept the idea that decades in the future they end up as a net result, for the first decade or so, clearly they are the exact opposite of stimulus. They suck in wealth and consume it while creating nothing.

    We can’t even get people to understand that about government spending, there is no hope of them understanding the woes of Keynesianism.

  19. .

    Greenspan is more to blame.

    However, what on earth were they thinking with the “twist”? It failed miserably.

    QEII was an implicit loan to the EU. I’m certain of this. There was also a lot of sterilisaiton at the time.

  20. JohnA

    goatjam #1695473, posted on May 29, 2015 at 12:12 pm

    So like every other socialist/Keynesian who came before him, his explanation for the utter failure of his disastrous policies is that there were not enough of them.

    Exactly so.

    Not only is it yet another example of iatrogenic infection (the disease being caused by the treatment) but they have no idea: ignoramus multiplicitus and cannot see (occulus occludious maybe?) that flooding the world with newly minted “money” is going to do exactly what they bemoan – raise asset prices. It used to be called inflation, didn’t it?

  21. Ellen of Tasmania

    No sign of anyone learning anything here.

    It reminds me of those parents you see in the supermarket with the toddler carrying on to get what they want. Instead of disciplining the little terror, the parents just ‘explain harder’ why they can’t have another 3 bags of lollies.

    After 2-3 years with the undisciplined monster, they still can’t work out that ‘explaining why’ simply doesn’t instil self-discipline. They just think they have to explain ‘some more’. When the toddler grows up to be the recalcitrant teenager, the parents are still working away on their explanations and ready to blame anyone and anything but their theory of child-raising.

    Our economy is now the recalcitrant teenager.

  22. Makka

    “It used to be called inflation, didn’t it?”

    Inflation is the least of CB’s problems. Deflation is the problem they have and has been since the GFC. Without the QE’s , many banks especially in the EU would have long since gone under. It’s not at all certain that many still won’t. That’s what was making Bernanke and now Yellen pee down their legs.

  23. AP

    The most influential central banker in a generation, who guided the global economy through the biggest financial crisis since the Great Depression, has pinned the blame on governments for the ultra-low interest rates that are playing havoc with exchange rates, asset prices and incomes around the world.

    Who wrote this rubbish?

    The most influential central banker in a generation? A generation of what? Rabbits?

  24. Rohan

    I think we will soon see solar-powered hot-air airships, with black solar panels covering the balloon’s body, staying in the air 24 hours per day, for many days!

    Talking about pie in the sky

  25. AP

    Nicholas Grey: please invest your life savings and report back to us in ten years.

  26. Andrew

    Wish just once someone would ask the people “so why did unemployment halve after the sequester took out 75% of the massive deficit? Why was there no employment growth UNTIL the stimulus went away?” It would be nice to at least hear what Ben Kruglitz thinks the explanation is.

  27. Ant

    “What a great job.
    No care, no responsibility, no idea. Massive salary.”

    You sum up one of the key issues.

    Those making these disastrous decisions face no real, material consequences. Oh, they might cop the odd unkind media headline but they have ensured before leaving office that the public purse has been well and truly pilfered for all its worth and that they’ve set themselves up for life with fat payouts and pensions.

    The bulk of the damage gets easily deferred off years after their handiwork is in play and when it finally does hit any number of excuses can be readily found and enough idiot “experts” are always on hand to defend their ‘genius’.

    I’m pretty sure that if the politicians going on these borrowing and spending binges were to face personal financial sacrifice as a result of it the problem would be eliminated overnight.

    BTW, all this talk of the government needing to hit retirement pensions to balance the budget, how come the politician’s pension scheme always manages to sail through unscathed?

  28. @SeditionaryI

    The best thing that could have happened in 08 would be for the central banks and governments agreeing between themselves that it was time to let the market correct itself.

    They should have done everything in their power to tip the world economy over, shake out all the diseased institutions and then set about starting all over again.

  29. H B Bear

    The most influential central banker in a generation? A generation of what? Rabbits?

    Goldfish more likely.

  30. goatjam

    Nicholas, Do! You! Work! At! Yahoo! by any chance?

  31. Louis Hissink

    The most influential central banker in a generation, who guided the global economy through the biggest financial crisis since the Great Depression, has pinned the blame on governments for the ultra-low interest rates that are playing havoc with exchange rates, asset prices and incomes around the world.

    Spot on – it’s the politicians who manipulate the CB’s – after all the politicians need scape goats, no? It’s the politicians who spend more than what an economy can sustain in order to garner votes. It’s the same mindset behind the Ponti Schemes, they actually believe that since the debt is owned by the government which financed the debt, then it means one owes it to oneself, and the politicians are perplexed over our opposition to this idea. And sadly most lefties think the same, and who is to blame for that? The architects of the K12 education system producing morons, nice and sincere, but morons none the less.

  32. Nicholas (Self-Sovereignty) Gray

    No,! Goatjam! Do! you! think! I! should?!

  33. Econocrat

    The economic history of Australia is of wealthy nation well placed to be a dynamic Asian Tiger, but at every turn seeking to impose failed European socialism upon itself.

  34. Squirrel

    The news footage of all those wide-eyed, adoring groupies, bustling in to hang on every syllable of the Delphic platitudes, was particularly depressing – it was a snapshot of so much that is wrong with how the world operates now.

  35. Art Vandelay

    If spending money you don’t have stimulates the economy, why isn’t Greece the richest country in the world?

    PS – Steve, this article has a nice little explanation of Say’s Law:

    This is an aspect of what in economics is known as Say’s Law, which holds that goods are paid for in goods — i.e., that we manufacture widgets or grow tomatoes or write novels because we wish to consume shoes and poached salmon and Buicks.

  36. sdfc

    The economic history of Australia is of wealthy nation well placed to be a dynamic Asian Tiger,

    Oh please. Australia can’t compete with Asia, real wages here are too high.

    By what process is deflation optimal policy for a high debt economy?

  37. JohnA

    Makka #1695508, posted on May 29, 2015 at 12:53 pm

    “It used to be called inflation, didn’t it?”

    Inflation is the least of CB’s problems. Deflation is the problem they have and has been since the GFC. Without the QE’s , many banks especially in the EU would have long since gone under. It’s not at all certain that many still won’t. That’s what was making Bernanke and now Yellen pee down their legs.

    What a graphic image! Ugh!

    So you are saying they were happy to re-inflate the world’s economies to avoid facing the reality that those economies were essentially bankrupt anyway?

  38. Yohan

    The US government ran trillion dollar deficits for years after the GFC.

    2008: $458 billion
    2009: $1,413 billion
    2010: $1,294 billion
    2011: $1,300 billion
    2012: $1,087 billion
    2013: $680 billion
    2014: $483 billion

    But once again, the reason why Keynesian stimulus failed is we just didn’t spend enough.

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