It’s a tough blow to your ego when one of your heroes becomes one of your chief critics. So it must have been tough for Fed Chairman Ben Bernanke to see the famed economist Anna Schwartz beat up on his money-printing policies before she died last week at the age of 96.
Bernanke spent a great deal of his time crediting Dr. Schwartz for her wonderful book “A Monetary History of the United States,” which she co-authored with Milton Friedman. The book details the monetary mistakes that led in large part to the Great Depression, and Bernanke used its conclusions in part to justify his aggressive actions after the 2008 financial crisis.
Even Dallas Fed President Richard Fisher signed on to the Anna Schwartz bandwagon, telling me in an interview yesterday:
“I loved Anna Schwartz, She was one of the great monetary economists in history. And I wished we had listened to her words.”
So let’s listen to her words. Here’s what she told The Wall Street Journal in October 2008, just as the financial crisis began and as the Fed began its massive printing of cash…a money pump that now totals more than $2.7 trillion:
"The Fed has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is [uncertainty] that the balance sheets of financial firms are credible…the basic problem is the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
Remember, this was 2008. Since then the Fed has pumped even more liquidity into the system with little effect. Of course, Bernanke claims we would be in another Great Depression had he not acted as he did…a claim repeated by President Obama, for whom Bernanke has been very compliant.
And that’s really the heart of the problem. This Fed has become too compliant, too political. A central bank’s primary responsibility is to a nation’s citizens, not to its politicians.
In misdiagnosing the problem, as Schwartz pointed out, the Fed printed up trillions to buy government bonds and keep rates artificially low. That enabled free-spending politicians to spend even more. This was all done at the expense of the people, who have benefited little from expensive government programs.
When a central bank loses sight of its monetary goal and takes on the role of supplicant for free spending politicians, its mission becomes muddy and its actions often counterproductive, as Schwartz so clearly saw in 2008. The central bank’s primary duty should never go much beyond making sure that the money in your pocket holds its value, that the money you earn today will be worth the same tomorrow, that your savings will not be eaten up by inflation.
Some of the smartest minds at the Fed counter that the dollar has maintained its value throughout this period -- the most aggressive money printing scheme in our history. They say that inflation is not a problem now, nor is it likely to become one in the near future.
But there is always a cost to printing money when it does not reflect a concomitant growth in the economy. At the very least, that cost has been the complacency of politicians, who have spent so much because they can borrow so cheaply. At worst, it could be the explosion of hyper inflation when all the money that’s been printed begins to circulate.
And that’s why the Fed’s policy actions over the past few years worry me, and far more important, that’s why Schwartz was worried. Her scorn for those policies should haunt her student, Ben Bernanke, even now from beyond the grave.