Ben Bernanke, the former head of the Federal Reserve recently warned of an impending economic crash. A fiscal stimulus package of tax cuts and increased spending will tip an already heady US economy with an unemployment rate of 3.8% over the edge ‘and then in 2020, Wile E. Coyote is going to go off the cliff and look down’, in the words of the retired Fed chief.
One may be cautious lending too much credence to the utterings on a man who in 2007 thought that the fallout from the US mortgage market bubble was ‘likely to be contained’, but when Bernanke speaks, he is not only engaging in economic forecasting – for that purpose, it can seem wise for an economist to predict a recession after the second longest period without one in recorded history. But ‘Helicopter Ben’ has another reason to prophesy about the inevitable downturn: he is pre-emptively placing the blame for the coming recession squarely on the shoulders of the Trump administration, which he claims has applied economic stimulus ‘at the very wrong moment’. This, he surely hopes, should deflect any blame for future events from the Federal Reserve itself, which has enacted unprecedented lax monetary policies for a decade – until 2014 on his watch.
Bernanke is not courting controversy here. The traditional view of central banks is that they are guardians of economic stability and that their role is reactionary or at least pre-emptive: responding to economic conditions, they usher the economy towards targets of inflation and/or employment, which in normal times supposedly can be done simply by manipulating short term interest rates. And empowered with tools to radically impact the economy, these central planners can, should the economy derail, step in with bold policy to correct the problems and return conditions to the path of sustainability.
But this traditional view choses to largely disregard the possibility that those tools could be applied inappropriately and affect conditions that provoke recessions. The role of the central bank is that of a macro-economic rescue service which steps in once the folly of the people has once again landed them in a mess of their own creation. Perish the thought that they bear any responsibility for creating unsustainable conditions in the first place.
The reality is of course that it is the very presence of central banks, the overlords of the fiat money system, that is the root cause of the business cycle, with its seemingly inevitable ups and downs. The Austrian business cycle theory explains how. In a free economy, interest rates are simply reflecting time preference for money. A higher savings rate drives interest rates down and encourages business to engage in long term investment. This is appropriate as the consumer, by the very act of saving, has decided to spend income in the future as opposed to the present. The decision by consumers to defer consumption to the future makes available the resources that business invests for production. In this way interest rates coordinates consumption and production over time.
When central banks manipulate interest rates, inter-temporal choices become based on erroneous information. When interest rates are kept too low, businesses are encouraged to over-invest, producing to meet demand in the future – while consumers are encouraged to increase current consumption, as the return on savings has dropped. This over-investment in longer-term investment projects are based on too little real saving of resources (consumers have actually not made the resources available through deferred consumption) and as a result not all projects will be able to come to completion. This is the inevitable recession, caused by manipulation of the price of money. The dynamics of the recession will, if given the opportunity to run its course, re-allocate production resources in line with real, inter-temporal demand.
Such a theory, which places responsibility for recessions on the shoulders of central banks, is naturally shunned and snubbed by central bankers and others in political and academic circles who are wholesale invested in the fiat currency system. Bernanke has no time for such ideas. Instead, he picks out a convenient scapegoat in a Trump administration who spurned his own legacy by refusing to grant a second term as chairman to his successor, Janet Yellen, who had backed his aggressive policy of quantitative easing and zero interest rates. But central bankers cannot have it both ways: monetary tools that have the power to manipulate an economy back from the brink has, if applied haphazardly, the potential to tilt an economy into recession. Bernanke is a clever man, but no bureaucrat possesses the information and skills to replace the market and impose the correct interest rates on the economy. It is indeed an impossible job – and no-one has to do it.