Integrity vs intelligence

Calculated Risk is one of the best, and most statistically useful, economics blogs on the Internet. However, I do have to disagree with one of CR’s recent posts in which he comments on the character of the current Federal Reserve Chairman. Contra CR, I don’t think it is the least bit unreasonable to have serious questions about Ben Bernanke’s integrity:

“It is one thing to have different views from those of the Fed Chair on particular decisions that have been made– I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke’s intellect or personal integrity. As someone who’s known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he’s taken, let’s start with an understanding that that’s been his overriding goal.”

I agree with Professor Hamilton.

I assert, to the contrary, that if one is sufficiently familiar with Mr. Bernanke’s books and speeches, one is forced to choose between his intelligence and his integrity. I have no doubts at all about the former and I am reasonably confident about his lack of the latter. By way of example, I quote his 2007 speech to the Bundesbank:

“I will begin by reviewing the origins and development of the global saving glut over the period 1996-2004, as discussed in my earlier speech, and will then turn to more-recent developments…. The question at issue, therefore, is whether the decline in the realized saving rate in the United States reflected a decline in desired saving or was instead a response to other, possibly external, economic developments. Or, in textbook terms, did the fall in the realized saving rate in the United States reflect a shift in the demand for savings at any given interest rate (a shift in the saving schedule) or a decline in savings induced by a change in the interest rate (a movement along the saving schedule)? In fact, there is no obvious reason why the desired saving rate in the United States should have fallen precipitously over the 1996-2004 period.5 Indeed, the federal budget deficit, an oft-cited source of the decline in U.S. saving, was actually in surplus during the 1998-2001 period even as the current account deficit was widening.”

First, as Stephen Roach of Morgan Stanley pointed out three months before Bernanke gave his speech, there is no “global savings glut”. The global savings rate as a percent of world GDP fell from 23 percent to 22.8 percent from 1990 to 2006; the reason Bernanke – in 2007 – chose 2004 as a figure is because the global savings rate had briefly risen to 24.9 percent before falling back below the 24-year average of 23 percent.

Second, Bernanke had to know the answer to the question he posed was “a decline in savings induced by a change in the interest rate” since the interest paid on 6-month CDs from 5.7 percent in 1996 fell to 1.0 percent in 2004. This is not only an obvious reason that suffices to explain the decline in U.S. personal savings, but is one that Bernanke, in his role as a Federal Reserve governor, absolutely had to know. The fact that he cites far more obscure interest rates in his 2007 speech, such as the real yields on inflation-indexed government bonds in the UK and Canada, strongly supports this contention.

Why would Bernanke speak in such a deceitful manner? For the same reason he is stonewalling the US Congress and refusing to allow any audits of the Federal Reserve’s activity. He is desperately attempting to keep people from realizing that the Federal Reserve not only created the Great Depression, but that it has most likely played a central role in bringing about its return. The attempts to deceive may be silly and implausible, but it’s all the Bernanke has left if his best efforts prove unsuccessful in averting the contraction in 2010 he has to know is in the works.

It’s worth noting that the “global savings glut” theory is pure Keynesianism, as is the famous helicopter money response to economic contraction. There’s nothing truly monetarist about these practitioners of active and discretionary monetary policy.

UPDATE – Can you spot the savings glut? From Brigitte Desroches and Michael Francis,.


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