Generational Dynamics: Forecasting America's Destiny Generational
 Forecasting America's Destiny ... and the World's


Ben S. Bernanke: The man without agony

Bernanke and Greenspan are as different as night and day, despite what the pundits say. (29-Oct-2005)
Summary Ben S. Bernanke, President Bush's nominee for the new Fed Chairman, is completely different from the man he'll be replacing, Alan Greenspan. Nowhere is the difference so apparent as when you contrast Bernanke's "What me worry?" attitude toward economic bubbles with Greenspan's genuine agony over the fact that his gut is telling him that we're headed for a major financial crisis.

Possibly what bothers me most about Ben S. Bernanke is that I fail to detect in him any of the agony that has characterized Alan Greenspan’s speeches in the last year.

There are many things - race, religion, etc. - that are irrelevant to predicting how a Fed chairman will conduct policy. But the generation into which a man is born is very relevant.

We can see that right away in their policy priorities.

A generation apart

Greenspan was born in 1926, and grew up surrounded by massive starvation and homelessness in the Great Depression, so his priority at the Fed has been to contain the damage from the 1990s bubble.

Contents - This page
A generation apart
What, me worry?
Beating the Depression and the Nazis
History has not dealt kindly

Bernanke was born in 1953 and grew up during the 1950s, when America had already defeated the Depression and defeated the Nazis, and no goal was out of reach. He was in college in the 1970s when high inflation was the major problem, so naturally inflation is his highest priority policy issue today.

Bernanke doesn’t worry about bubbles, because to him those were all fixed in the 1930s, and now they always take care of themselves. In October 2002, he said:

Ben Bernanke
Ben Bernanke

In view of those remarks, it's not surprising that Bernanke testified to Congress's Joint Economic Committee last week that although housing prices have risen 25% over the last two years, these increases "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

What, me worry?

Actually, Bernanke doesn't even think that the 1929 crash was much of anything. In October, 2000, he wrote that the crash was caused by Fed policy errors, specifically raising interest rates in the early 1930s. He wrote:

But the generational difference between Bernanke and Greenspan goes far deeper than simple policy priorities. Bernanke belongs to the arrogant, narcissistic “Boomer Generation” that humiliated Greenspan’s generation in the 1960s-70s, and forced two Presidents (Johnson and Nixon) to leave office in disgrace. This is where the Boomer generation gets its “nothing is ever my fault or my responsibility” attitude.

That explains Bernanke’s incredible remark last year that America’s exponentially increasing rate of public debt is everybody’s fault but ours, because other nations are guilty of a a "global savings glut." Only a Boomer would say something like that.

But the scariest (to me) of Bernanke’s views are the ones that economists this week have been most abundantly praising: His belief, as laid out in a speech he made on October 7, 2004, that the Fed strongly influences the stock and bond markets merely by publishing the Open Market Committee minutes earlier and more often.

This is crazy. You can read investment advice in a million places on the Internet, but I’d like to see just one place where it says, “Before deciding whether to buy this stock, check to see whether the Open Market Committee minutes have been released yet.”

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I’m all for more information from the Fed, but publishing meeting minutes cannot possibly affect the markets for more than a day or so, or until the price of oil per barrel changes, whichever comes first.

Beating the Depression and the Nazis

Alan Greenspan would never (I hope) make a speech like that. He grew up surrounded by people in the G.I. generation who beat the Depression and beat the Nazis by making real sacrifices and real compromises and risking their lives. How many battles were won by releasing meeting minutes?

Boomers in general don’t realize how they’ve been protected by people in the G.I. generation and in Greenspan’s Silent Generation. In the 1980s, Democratic and Republican senators put party politics aside to agree on a plan to save Social Security, and then again to agree on a plan to reduce the budget deficit. In 1996, Democratic President Clinton compromised with the Republican-controlled Congress to eliminate the budget-draining welfare entitlement.

But those people are gone now. Republicans and Democrats from the Boomer and Gen-X generations are incapable of compromising on anything. All we get today are bitter political battles, but no important agreements or compromises. That’s why the credit markets are out of control. (Did you know that the plan to spend $2 billion on Hurricane Katrina recovery would amount to over $1 million per affected family?)

So it’s worth taking a minute to look at how the tone of Greenspan’s public statements in the last two years has been starkly different from that of Bernanke’s statements.

In January, 2004, Greenspan was quite positive and hopeful when he bragged in a speech:

"There appears to be enough evidence, at least tentatively, to conclude that our strategy of addressing the bubble's consequences, rather than the bubble itself, has been successful. Despite the stock market plunge, terrorist attacks, corporate scandals and wars in Afghanistan and Iraq, we experienced an exceptionally mild recession, even milder than that of a decade earlier." -- Alan Greenspan to the American Economic Association's annual meeting.

Greenspan began to express mild alarm at the increasingly serious economic situation in October, when he referred to the debt level and housing bubble:

These mild expressions of concern continued even through the November publication of Greg Ip’s Wall Street Journal article on Greenspan’s legacy, in which he laid out at length his detailed strategy in dealing with the 1990s bubble. The strategy was flawed, as I wrote at the time, but at least Greenspan had a strategy. (Bernanke doesn't believe that a strategy is needed.)

By January, 2005, Greenspan's statements became increasingly alarming. In one speech, he said:

"The dramatic advances over the past decade in virtually all measures of globalisation have resulted in an international economic environment with little relevant historical precedent."

A careful reading of that speech reveals that, because of unexpected globalization of the economy, Greenspan was completely repudiating the strategy that Greg Ip had described in November in the Wall Street Journal.

For some strange reason, neither Ip nor any other major financial reporter discussed this repudiation. At least Greenspan’s “conundrum” remark, referring to the puzzling worldwide fall in long-term bond rates, has been widely reported

Through 2005, Greenspan has seemed to me to be increasingly in agony, as he’s seen the stock bubble of 2000 morph into a stock bubble and a housing bubble. This was beginning to look all too familiar to him; things he hadn’t seen since his childhood. It’s not surprising that Greenspan privately told France’s Finance Minister last month that “the United States has lost control of their budget.”

His public remarks were at their starkest in his “swan song” Fed speech at the end of August.

In that speech he commented favorably on the economy’s flexibility because it encourages investor risk, but warned about the stock market and housing bubbles, and added:

"To some extent, those higher [stock and housing] values may be reflecting the increased flexibility and resilience of our economy. But what [investors] perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."

History has not dealt kindly ...

When Greenspan says that “history has not dealt kindly,” he’s referring to the 1930s Depression, and he’s telling us that he thinks it’s going to happen again. Just reading his words you can almost hear the agony in his voice, as he realizes that the horrors he suffered as a boy are going to happen again – and that he’ll be blamed for it, and that it will be his legacy.

The stock market today is priced at Dow 10,300, but the underlying book value of the market is Dow 4,500 according to my computations – and according to computations performed using a different method by analyst Adam Barth in an article appearing in the July 11, 2005 issue of Barron’s.

So the market is priced at 228 per cent of book value today, which is about where it was just before the 1929 panic. Bernanke undoubtedly believes that a new panic today wouldn't do any more harm than the 1987 panic that he's old enough to remember, but the market was at 102 per cent of book value at that time, so it's not surprising that the market recovered quickly then. A panic today would be as bad as 1929.

In his heart, Greenspan knows that. The youthful Bernanke, incredibly, doesn't have a clue.

Maybe it’s just as well. Whatever’s going to happen is going to happen, no matter what Bernanke does at this point. I don’t know if he's religious or not, but if he is religious then he might wish to start praying.

Copyright © 2002-2016 by John J. Xenakis.