Bernanke Taken to the Woodshed

The annual FED-sponsored clambake at Jackson Hole produced devastating criticism of Chairman Bernanke and his unsuccessful efforts to resolve the deepening credit crisis। This criticism came from several prominent economists, Bernanke's peers. Of special note was Dr. Martin Feldstein's warning that a serious recession now impends. The eminent Feldstein -- a former chairman of the President's Council of Economic Advisers -- called for a 100 basis point cut in the key FED Funds rate. No piddling quarter point or half-point cuts would be adequate, in Feldstein's view. Another well-know economist gave Bernanke an "F" for failing to cut the FUNDS rate in the face of this very serious financial crisis. Others warned that house prices in some major cities could fall 40-50% before the bear market in residential real estate hits bottom.

The net result of these telling criticisms is the establishment of an intellectually and analytically respectable counterpoise to the hitherto unchallenged FED thesis about the seriousness of the crisis and the minimal steps needed to deal with it। Bernanke's room for maneuver has now been severely constricted. Not only has it now become extremely difficult for Bernanke to maintain the absurd position that he will address the crisis effectively without "bailing out" the malefactors (principal among whom, of course, is the FED itself), but the Chairman is now constrained to make substantial interest rate cuts virtually immediately.

Bernanke himself admitted that his assessment of the seriousness and containability of the sub-prime crisis has been dead wrong। No one imagined things would get this bad, he insisted. In other words, neither his computer models nor his inflation-phobic colleagues provided sound guidance. Surprise, surprise. As for the endlessly repeated nonsense about not "bailing out" speculators, well, this will go by the board, just as it always does. The biggest speculators, after all, were the blue chip banks, and, of course, the FEDERAL RESERVE itself. It was the FED, after all, which closed its eyes for a decade as the mortgqge mania built and built, producing the inevitable bubble and laying the ground for the equally inevitable collapse.

We doubt that the second most powerful man in the United States has a yearning to return to the cloistered groves of academe. The exercise of power is a heady thing, and we doubt the Chairman would relish a return to obscurity. Bernanke is a smart man, and he knows that now, if he fails to cut rates sharply and a recession does indeed occur, it will be BYE BYE Bernanke. The man did not achieve his present eminence by acting contrary to the dictates of pragmatism.
As far as we can judge, it's all over but the shouting. Significant reductions in the FED-controlled overnight rate are imminent, regardless of the frustration of the inflation-phobes at the central bank. The only question is how much damage the dilly-dallying will have cost the economy and the American people.