Ben Shalom Bernanke secured a second term as the chairman of the Board of the Federal Reserve because he played ball in his first term. He played ball obediently and unquestioningly.
In the ceremony announcing the reappointment, President Obama said that Bernanke’s “bold action and out-of-the-box thinking” helped save the economy from free fall. That was the agreed-upon line on Bernanke that the media had been promoting for over a year: a bold and unconventional thinker and doer – a veritable revolutionary, in other words, of the kind that these crisis times demanded. Google “Bernanke + rule book” and see how many sources, from the New York Times to the National Public Radio, approvingly talk of Bernanke “throwing out” or “tossing out” the rule book – the rule book being the policies of the Federal Reserve.
Rule books spell out the details and boundaries of actions in organizations. They are written to be followed. Anyone who has ever worked in an organization knows that ignoring the rules, to say nothing of tossing them out altogether, would be committing career suicide. In many cases, it would be a criminal offense. Imagine a pilot violating the rules of aviation. Or an accountant ignoring generally accepted accounting principles. Or a bank compliance officer not reporting suspicious transactions. Such conduct is so predictably ruinous that if willful and intentional, must to be pathological.
For Bernanke, this pathology was presented as heroic and as the evidence of his courage. The trick worked thanks to the perversion of the social frames of reference, of the kind that Shakespeare said make foul fair, black white, wrong right, base noble and coward valiant.
Let us begin with the “tossing out” part, that not-playing-by-the-rules shtick that is invoked to conjure up the go-it-alone ways of the heroes the Western movies. Hollywood was instrumental in creating the link between such “mavericks” and the frontiersmen who built the U.S. In the American psyche, patriotism and individualism – the latter connoting non-conformity – are thus linked.
The American individualism, however, always had a commercial base, even when it took the form of exploring the nature. The “enterprising” men and women could go off the well traveled paths and take whatever risks they chose, as long as their goal remained pursuit of money, which the Founding Fathers somewhat defensively called “the pursuit of Happiness”. That kind of individualism was encouraged, promoted and admired because it was in line with the guiding principles of the country.
Individualism, if it involved questioning the guiding principles which were codified in law, was strictly discouraged because the “common good” was supposed to trump individual interest. Those who went against these principles, whether for personal gains or out of concern for others, were branded outlaws and dealt with accordingly.
With the rise of speculative capital, the balance between the individual and the common good – between the narrow and general interests – was shaken in favor of the narrow interest. Speculative capital is an expansionary force. Expansion is the condition for its preservation. Constant expansion naturally brings it into conflict with the myriad of laws and regulations which inhibit its growth. So it strives to eliminate them. In Vol. 1, I wrote at length on the dialectical relation of speculative capital to law and regulation, which produced, starting with the Carter presidency up to current times, the longest running orgy of deregulation in the history.
Speculative capital abhors regulation. Regulations interfere with the cross-market arbitrage that is its lifeline. If speculative capital cannot freely operate, it cannot generate profits and must cease to exist. The opposition of speculative capital to regulation is thus not a matter of some technical or tactical disagreement but a question of life and death.But how could the idea of dismantling laws that protected the common interests be sold to the public? The trick was in framing the issue “properly”, which is to say, emotionally, by personalizing it. Whilst originally the “common good” trumped individual interests, now the concern for the individuals was used as the pretext for discarding the rules for the common good.
The attack of speculative capital on regulation is not indiscriminate. Though generally suspicious of regulation, speculative capital singles out only those regulations which directly or indirectly hinder its free flow across the markets. The same speculative capital, meanwhile, supports and pushes for the passage of sweeping laws. In so opposing the regulation and supporting the law, speculative capital distinguishes between the two in ways few philosophers of law could.
Focusing on the individual is the secret and foundation of storytelling in which Hollywood excelled. So beginning in the early ‘70s, parallel to the rise of speculative capital, we see the appearance of Clint Eastwood as “Dirty Harry”, a sadistic and criminal cop who shot and tortured suspects but the audience was made to cheer for him because his actions were in defending the “rights” of the victims. A torrent of vigilante movies and “tough but fair” cops followed, all with a similar theme but progressively more violent and more lawless characters. The culmination of that trend is the current TV show “24” where torture is sold as advisable and even normal.
To what extent this indoctrination – now supported and reinforced by the radio talk shows, newspaper columns and the TV commentaries – has succeeded in making foul fair can be seen from the comments of Antonin Scalia, the justice of the Supreme Court of the United States about the fictional character of “24”.
Senior judges from North America and Europe were in the midst of a panel discussion about torture and terrorism law, when a Canadian judge’s passing remark—“Thankfully, security agencies in all our countries do not subscribe to the mantra ‘What would Jack Bauer do?’ ”—got the legal bulldog in Judge Scalia barking.Jack Bauer saved Los Angeles. He saved hundreds of thousands of lives!
The conservative jurist stuck up for Agent Bauer, arguing that fictional or not, federal agents require latitude in times of great crisis. “Jack Bauer saved Los Angeles. … He saved hundreds of thousands of lives”...
The real genius, the judge said, is that this is primarily done with mental leverage. “There’s a great scene where he told a guy that he was going to have his family killed,” Judge Scalia said. “They had it on closed circuit television—and it was all staged. … They really didn’t kill the family.”
These words about a fictional TV character from someone charged with interpreting the U.S. Constitution.
(Read the last paragraph again and pay attention to the tone, narrative, the use of “great scene” and the way Scalia articulates what he has seen on TV: “There’s a great scene where he told a guy that he was going to have his family killed. They had it on closed circuit television—and it was all staged. … They really didn’t kill the family.” If this quote is accurate, the man’s mental capacity can be no more than that of a 7-year old.)
It is within this environment that Bernanke’s throwing out the rule book “to save the financial system” was sold to the public as a heroic, albeit slightly unconventional, act – in the manner of Jack Bauer saving Los Angeles from a nuclear attack. The president had little choice. They had him on the run with the same rhetoric and a not-so-subtle threat, in case he did not get the hints:
A top White House official said Mr. Obama had decided to keep Mr. Bernanke at the helm of the Fed because he had been bold and brilliant in his attempts to combat the financial crisis and the deep recession ... Some analysts caution that the economy is still so fragile that financial markets would react badly if President Obama decided to install new leadership at the Fed anytime soon.Why, indeed. That would be like changing Superman just when General Zod had broken into Daily Planet.
“He’s the best person for the job,” John Makin, a senior fellow at the American Enterprise Institute, said of Mr. Bernanke. “Why would anyone want to change the Fed chairman now?”
Three questions remain. One concerns Bernanke’s boldness. One of the main criticisms directed at Ibsen’s feminist manifesto, A Doll’s House , is Nora’s quantum psychological leap that takes her from being a “silly bird” of a housewife to a woman able to leave her husband – all within the span of 48 hours. The criticism is a valid one. In real life, people who have been meek all their lives would not disturb a comfortable status quo to face uncertainty and danger. How, then, did a meek academic, whom the New York Times described as “a quiet and often unprepossessing person” – and was installed at his position because of those qualities – become so bold so as to throw out the Federal Reserve rule book?
The second question is, how did he know what he was doing, after he had tossed out the rule book, was the right thing to do?
Finally, who was behind Bernanke? Who promoted and passed him off as a bold and revolutionary thinker and doer?
The answer to all three questions is: speculative capital.
Among the official press, the New York Times alone sensed the need to explain the source of Bernanke's uncharacteristic courage; it implied it came from the firm conviction of knowing the right way, itself the result of first-rate scholarship.
Mr. Bernanke was a leading scholar of the Depression who had broken important ground on the links between financial crises and the real economy. In his work on what he called the “financial accelerator,” Mr. Bernanke argued that a run on banks or other disruptions in financial markets could turn a relatively mild downturn into a severe one.In truth, the quality of Bernanke's academic work is on par with his academic peers: overdone on technical details, dreadfully shallow, almost childish in depth. Here is a single, albeit telling, line from one of his main speeches just before the onset of the financial collapse that shows his grasp of finance.
As emphasized by the information-theoretic approach to finance, a central function of banks is to screen and monitor borrowers, thereby overcoming information and incentive problems.The central function of banks is to screen and monitor borrowers – this according the “information-theoretic approach to finance”, which he approvingly quotes.
The same year that he spoke of this central function, the U.S. banks sent 5 billions credit card offerings to about 112 million U.S. households – roughly about one credit card per week per household. That is screening borrowers for you.
Bernanke knows finance no more than Scalia knows law – or the reality.
So, no, it was not Bernanke’s knowledge that showed him the way and the strength to act. It was the demand of speculative capital.
Speculative capital is constantly in motion. Whether in expansion during “economic growth” or in retraction during crisis, it naturally finds the most profitable path for itself. Because the public at large has been made to see the events from the viewpoint of speculative capital, the path that speculative capital chooses appears as the only viable, logical option. Alternative options, if they are noticed at all, seem non-workable, irrelevant or radical.
In this way, the course of action becomes preordained and if the rules stand in the way, so much the worse for the rules.
In this environment, functionaries rise to fame. By virtue of unquestioningly executing the diktat of speculative capital, they are thrust upon the center stage as bold thinkers and doers – bold because they discard the existing rules. In doing so, they become the instrument of the destruction of the old system and the creation of a new one in which speculative capital holds sway even more extensively.
But speculative capital is self destructive. It destroys itself and the environment in which it operates, only that each phase of destruction is more intense and violent.
That is where we stand now. The “financial markers” seem to be gradually stabilizing but the Federal Reserve, in circumvention of all the laws and regulation that created it and defined its operations, is saddled with over $2 trillion of junk securities.
When a pilot deviates from the aviation rules or an accountant violates the accounting principles, the consequences are immediately clear. The consequences of the Federal Reserve issuing U.S. treasuries for junk is not immediately transparent. I will return to this topic in later entries and in Vol. 4.
In the mean time, Bernanke’s children and grandchildren will tell tall tales about how Grandpa Ben singlehandedly saved the world from the brink.