Bernanke’s policies have in fact failed on many levels. In the first place, he is a Keynesian who thought that more money would increase demand in the economy. Studies have shown that this did not work, that it actually backfired.
Every dollar of new borrowing encouraged by giveaway interest rates was more than offset by a reduction in spending by savers. When savers receive little or no return on savings, they cannot either spend or invest what they do not receive. Moreover, the repressed interest rates have actually discouraged bank lending while destabilizing pension funds and insurance companies.
Interest rates below inflation have succeeded in creating a mirage of prosperity by fueling a stock market rise, a rise that is looking more and more like another bubble among other Fed sponsored asset bubbles. But bubble or not, there is no demonstrated link in economic theory between a rising stock market and rising employment levels.
Yet even this recital of failure does not get to the heart of what is so tragically wrong with Bernanke’s and Yellen’s ideas. The worst part of their failed policies is that the severely repressed interest rates they have favored represent price controls, price controls blanketing the entire economy, and price controls never work.
There is an irony here. A large majority of professional economists, including those aligned on the political “left” as well as “right,” respond to surveys by indicating that they generally oppose “government price controls.” The problem is that most government price manipulations and controls are not advertised as such. They may be stealthy by design; or they may just take a form that is hard to recognize for what it is.
Ben Bernanke himself told a group of college students studying economics that he opposes price controls. He said that:
“Prices are the thermostat of an economy. They are the mechanisms by which an economy functions.”
But Bernanke’s Fed has unarguably been the chief price controller of our economy.
Why exactly are manipulated or controlled prices so damaging? A thriving economy is comprised of billions of prices and trillions of price relationships. Consumers rely on honest price signals and so do investors. They tell us what we need to know in order to make sound economic decisions.
If prices are not allowed to communicate accurate and honest information, no economic system can be expected to function properly. If the price manipulation or control is not extreme, the economy may limp along, impaired, not realizing its full potential, but not in overt crisis. If the undermining of honest prices is extreme enough, the system will visibly falter and may even collapse, as in 1929 or 2008.
Unfortunately price manipulations and controls just lead to more manipulations and controls.. In 2009, the government tried its best to restore the health of banks by finding buyers for their bad mortgages. Generous subsidies were offered to persuade Wall Street to buy the mortgages. But Wall Street refused all the offers. Why? Because the government had taken over the mortgage market, and in the absence of normal market prices, no one had a clue what the mortgages were worth.
This is a dramatic example, but on close examination too much of what the entire government does in trying to lead or regulate the economy involves a price manipulation or control. It is time to pay heed to some sensible advice from humorist P. J. O’Rourke:
“The price system] is a bathroom scale. We may not like what we see when we step on the bathroom scale, but we can’t pass a law making ourselves weigh 165. . . .”
Norwegian business executive Oystein Dahle reminded us that: [Soviet] socialism collapsed because it did not allow prices to tell the economic truth.” Janet Yellen, like Ben Bernanke before her, seems completely unaware of the importance of honest prices. How can we expect the economy to recover under her stewardship?