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Lula, Not Bernanke, for the U.S. Fed

How would Brazilian President Lula make a better U.S. Federal Reserve chairman than Ben Bernanke?

January 21, 2010

How would Brazilian President Lula make a better U.S. Federal Reserve chairman than Ben Bernanke?

I know, I know. Ben Bernanke has been re-appointed by President Obama to a second full term as Fed Chairman. And where on earth would we end up if a non-American — and non-economist, to boot — were to run the world’s most watched central bank?

But seriously, let’s review the past decade or so — and what both men have accomplished in their time. Lula took over as President of Brazil in January 2003, began a second term in January 2007 — and can point to a solidly managed economy and a considerable improvement in the living circumstances of many Brazilians, from an ever-growing middle class to formerly disenfranchised poor people.

Indeed, since 2003, more than 32 million Brazilians of 198 million have entered the middle class, and about 20 million have risen out of poverty.

When comparing Lula’s and Bernanke’s records over the past several years, one crucial difference emerges: While Lula and his government were able to use the last decade of solid economic growth to actively reduce the near-grotesque level of income inequality in their society, inequality actually rose in the United States.

There, the already pronounced level of income inequality was aggravated further, resembling the Gilded Age of the late 19th century — and a mirror image of the situation in Brazil. In 2007, the top 1% of Americans accounted for nearly one-quarter of all U.S. income — nearly equal to the peak reached in the “roaring 1920s.”

For much of the last decade, Mr.Bernanke has played a prominent role in overseeing the U.S. economy, first as a member of the Federal Reserve Board, then as Chairman of the Council of Economic Advisors — and then, since February 2006, as Fed Chairman.

While many power brokers, with the benefit of hindsight, may feel unhappy about the rather perverse income trends in the United States, Mr. Bernanke is bound to say, “What’s a central bank got to do with that? We’re just in charge of monetary policy — and, on that front, as measured by the classic yardstick of inflation, we did fine, thank you.”

Indeed, that is much of the argument that Mr. Bernanke presented in his address to the American Economics Association in early January 2010. Of course, he used many more words at that occasion and principally sought to present a defense as to why he, and his predecessor Alan Greenspan, had not screwed up, despite plenty of questions about their steering of the U.S. macro economy.

I know, I know, central bankers tend to claim they are just in charge of monetary policy — and that is only a part of the larger macro economy.

But seriously, let’s remember that the core issue, combating inflation, really turned out to be pretty much a non-issue in the period in question. That should be clear to all, especially considering that at least half the global debate during that period centered on worries of deflation (!).

Given the vast expansion of the global labor pool brought about by the dissolution of the Soviet bloc and the liberalization of the Chinese economy, no central banker on earth — aside from those in Zimbabwe — had a hard time preventing inflation.

Taking credit for that, in effect, means stealing the credit from those to whom it belongs — the former communists who, imploding their empires and/or outdated economic models, created one solid bulwark of anti-inflation.

Of course, Mr. Bernanke, walking in the footsteps of Alan Greenspan, has had a ready answer for a long time as to who’s to blame for the crumbling of the U.S. economy: the global savings glut.

According to this peculiar worldview, it was really the fault of the rest of the world, principally the major savings countries, that any destabilization of the world economy occurred. When in doubt, the message goes, preferably point beyond your own shores.

Anybody who had hoped Mr. Bernanke would use his recent AEA speech for his manly equivalent of a mea culpa, though, was sorely disappointed. The Fed Chairman said that this was not the time to revisit that theory, even though he suggested that he basically still felt good about his glut theory.

As close as he did get to an apology was his statement that the current crisis was very possibly “the worst in modern history.” And he added, there were “important gaps in the architecture of financial regulation” — but that was true “around the world.” So, true to form, there was no admission of special responsibility on the part of the Fed.

The remainder of his speech was a studious exercise in arguing against lots of things that are certainly part of the broader debate, such as pricking asset bubbles via monetary policy, but not at the center of the real issues at hand.

What makes all that fancy footwork by the Fed Chairman seem disingenuous is that he and his predecessor, at least in times when everything goes swimmingly (supposedly), have no trouble taking credit for being the top minds in the universe.

But once things are not so brilliant anymore, both he and Mr. Greenspan before him simply clam up. Then, it’s back to the “hey, we’re just in charge of monetary policy” claim.

Or, even more defensively, they engage in argumentative patterns that are designed to make the Fed appear as just one small part in a global cobweb of players, so as to exculpate themselves from any fault.

That effort is disingenuous because, in the de facto structure of U.S. economic policymaking, as well as considering the breadth of its staffing and competence levels, the U.S. Federal Reserve System is indeed highly competent — and statutorily in charge of nothing less than the safety and soundness of the U.S. financial system.

And on that crucial front, the Fed leadership did fail. Contrast that to supposedly lesser countries and lesser central banks (think Brazil, Chile or Mexico) that did not fail in their duty to be a disciplinarian for the entire economy.

They know what every central banker worth his or her salt knows: Their job is to be the resident pessimist, the rather monotonous sounding one who has the guts to call people to the carpet when everybody wants to go dancing.

I said earlier the Fed’s leadership, by making much ado about having kept inflation in check, was in effect stealing credit from the communists. The reality, at least judging by Lula’s high standard, is a bit worse.

Remember, Lula used much of the gains of the 2000s to improve the economic fortunes of Brazil’s lower classes. Not so Alan Greenspan and Ben Bernanke.

Consider that they presided over a U.S. banking system where banks earned most of their profits at the bottom of the credit spectrum.

It should always have been crystal clear that condoning such a policy would do nothing to improve the safety and soundness of the U.S. financial system — even though it did improve the profits of these institutions over the short term.

What made the Fed’s stance more than dubious — and probably ethically pernicious — is that it did nothing to prevent the constant increase in the debt levels of middle class and lower class Americans. As if a nation’s financial system could either be safe or sound if those two pillars are crumbling under a mountain of debt.

Truth be told, allowing that to happen made the U.S. Fed, in a post-Soviet, post-Mao world, the Communists of the day.

How so? By allowing debt to rise at a time when society’s top 5% were raking it in, they helped policymakers avoid addressing the biggest issue of America’s 2000s — the profound stagnation in the development of real wages, which have been at a standstill for over a decade. Consider that during the 2000s, the median incomes of all U.S. households rose by less than $800, or by just 1.6%.

In sharp contrast, Lula can be credited with taking a far more broad-based approach to economic policymaking. He made sure that that rare thing, a boom, would be made to count for the country’s poorest people, so that income inequality is less of a black mark on the nation.

That, plus his gifted steering of the economy at large, are skills sorely missed at the U.S. Fed.

As to Ben Bernanke’s future, there are those who believe in redemption — and I would agree. To show some penance, perhaps he should be relegated to Vice Chairman of the Fed for life, or until he has cleaned up the mess he helped preside over when it was being created.

As to the claims of his heroic nature (not even to bother about his selection as Time’s Man of the Year), it is important to keep things in perspective. Unlike Mr. Bernanke, I have no claim to be a scholar of the Great Depression.

But I do remember from as far back as high school that, in examining the causes back in 12th grade, we were told it had something to do with the machinations of Austria’s Creditanstalt, which provided a crucial trigger for the global calamity.

Fill in Citigroup for Creditanstalt — and there you have it. Mr. Bernanke’s argument that now is the time to focus more on banking supervision and systemic risks of big banks is a disastrous claim for a great scholar of the Great Depression.

Shoveling stuff out of the monetary helicopter is the easy stuff. Where experience should count — and be brought to bear — is in the prevention of crises. And on that critical front, he scored an “F” — searching for blame everywhere (witness the “global” savings glut) but on the home front.

In conclusion, Mr. Bernanke surely has a lot of redeeming to do. Move over, Ben — and let’s welcome Lula.


Lula made that rare thing — a boom — count for Brazil's poorest people, so that income inequality is less of a black mark on the nation.

The Fed did nothing to prevent the constant increase in the debt levels of middle class and lower class Americans.

The Fed's leadership, by making much ado about having kept inflation in check, was in effect stealing credit from the communists.

When everything goes swimmingly (supposedly), the Fed's leaders have no trouble taking credit for being the top minds in the universe.

Now that things are not so brilliant anymore, it's back to the "hey, we're just in charge of monetary policy" claim for the Fed.