Ben saved the Bear

The hero of the day is clearly the understated Ben Bernanke. He inherited from his predecessor an unprecedented monetary bubble which sustained the myth that on Greenspan’s watch Americans, and much of the world, would not face bad times economically speaking. Unfortunately for Bernanke, his horoscope seems to be cast quite differently. On his watch, the United States and the rest of the world have walked into some of the most trying times in recent memory. Years ago, my friend Nadeem Ul Haque (now an “expert” with the largely out-of-date, largely irrelevant IMF) had passed on a key insight of his. More than World War II or Viet-Nam, the defining historical memory for most thinking Americans is the Great Depression. That a large, free, prosperous country could suddenly shut down perfectly good factories and offices, cut both production and consumption and descend into an impoverished state, seems frightening precisely because even now it is virtually impossible to believe that something like that could happen at all. Luckily for us, in contemporary times, the US Federal Reserve is headed by one who has done considerable academic research on the Great

Depression. One could almost call Bernanke the Depression Guru.

Many government decisions that now seem stupid in retrospect like raising tariffs, imposing trade barriers, increasing taxes and so on undoubtedly contributed to precipitating and prolonging the Depression of the ’30s. But the single-most important causal and contributory factor was allowing banks to go bankrupt. Unfortunately, it is an observable fact that banks and bankers do very stupid things, especially in good times, recklessly pursuing greedy ambitions and taking disproportionate risks. Why overqualified and overpaid bankers do this requires a whole thesis by itself. Suffice it to say that when growth rates are high, if the central bank obliges by creating a lot of money (as the noble Greenspan did) banks just go berserk. This has happened so many times that we have lost count. When things turn sour for bankers, what is the rest of society supposed to do? Even though the tenets of libertarian capitalism would suggest that we should let them stew in their own juice and let some of them go belly up, unfortunately this is just what we cannot do. When a factory shuts down, some people suffer. When a large bank shuts down, the ripple effects (because there are so many, many transactions between banks) can cause a monetary crisis and the fears of a repeat of the Great Depression come back to haunt us.

And it is to his credit that Bernanke has acted decisively to make sure that things do not spiral out of control. Fundamentalists have criticised his intervention to save Bear Stearns. He went well beyond the statutory obligations imposed on him. In doing so, he might have saved the world from a Great Depression. It is impossible to measure things that are avoided, that do not happen, that did not happen. But Americans who complain about a 5 per cent unemployment rate would do well to sit back and reflect on how their world would look if they moved to a 30 per cent unemployment rate which is what a depression would entail.

There is no doubt that there is a sickening feeling in the stomach to see incompetent and over-rewarded bankers being bailed out. But let’s not forget that while the creditors of Bear Stearns got protection, the shareholders did take a massive hair-cut as did the option-laden employees. Until in the goodness of time we devise something better than money to lubricate our economies, banks will necessarily have to be treated asymmetrically and partially as compared to other industries and not allowed to fail. The gossamer web of money and credit must endure and prevail.

What has been most impressive about the US system, which appears so cumbersome and clumsy many times (just think of the CIA’s list of failures!), is that the Federal Reserve and the executive were able to act quickly (literally over a weekend) and efficiently. They even managed to get their ponderous legislature to give tax refunds to millions of citizens to cushion them in these bad times. This certainly proves that despite the delays built into a democratic system, competent and intrepid persons in positions of power can act. We are not fated to stumble into economic catastrophes!

Incidentally, the data is murky. As of last quarter, the US does not seem to have been in a full-blown recession and even if we are in the midst of one, the cafe-goers of New York believe that it is a mild one at best.

Irrespective of the quibbling over the first and second decimal points in the GNP growth rates, one thing is clear: whether or not he has avoided or softened a recession, Ben Bernanke has for now helped the world steer back from the frightening precipice of a Great Depression.

The writer divides his time between Mumbai and Bangalore jerry.raoexpressindia.com