GIH: The ex-Fed chairman Ben Bernanke says that ‘overconfidence’ created the financial crisis. As any Fed Chair, has he become victim of his own Fedspeak training? Isn’t confidence good for markets, and fear is bad? Don’t we worry the investors will have ‘fears’ and depart markets, and spend significant efforts to restore their confidence?
Now that Ben Bernanke is no longer the head of the Fed, he can finally tell the truth about what caused the financial crash. At least that’s what a packed auditorium of over 1000 people as part of the financial conference staged by National Bank of Abu Dhabi, the UAE’s largest bank, was hoping for earlier today when they paid an exorbitant amount of money to hear the former chairman talk.
Bernanke confirmed as much when he said he could now speak more freely about the crisis than he could while at the Fed – “I can say whatever I want.”
So what was the reason, according to the man who was easily the most powerful person in the world for nearly a decade?
“Overconfidence.” (no, not “weather”)
Yup. That’s it.
The United States became “overconfident”, he said of the period before the September 2008 collapse of U.S. investment bank Lehman Brothers. That triggered a crash from which parts of the world, including the U.S. economy, have not fully recovered.
“This is going to sound very obvious but the first thing we learned is that the U.S. is not invulnerable to financial crises,” Bernanke said.
Actually what is going to sound even more obvious, is that subprime was not contained.
But going back to Bernanke’s explanation, brought to us by Reuters , we wonder: did he perhaps get into the reason for the overconfidence? Maybe such as the Fed’s endless hubris in believing it knew what it was doing, when time after time and especially over the past 30 years, the US central bank has shown that all it now does is lead the nation from bubble to bubble, from crisis to crisis, and replaces one asset bubble, first the dot com, then the housing, with another, even bigger one, until we get to the biggest bubble of all time – the stock market as you see it currently, where the S&P 500 soars to all time highs and when news of an ICBM launch can barely cause a dent in a ridiculous upward ramp driven by, you guessed it, overconfidence.
Only this time it’s different, because the Fed really know what it is doing. Or maybe this time is no different than any other market mania unwinding before our eyes, with the careful nurturing of the the Fed and its chairmanwoman, be it Greenspan, Bernanke or Yellen.
But has Bernanke at least learned something? After all he is supposedly a very smart man from Princeton? Why yes:
He also said he found it hard to find the right way to communicate with investors when every word was closely scrutinised. “That was actually very hard for me to get adjusted to that situation where your words have such effect. I came from the academic background and I was used to making hypothetical examples and … I learned I can’t do that because the markets do not understand hypotheticals.“
He concluded that he should “try to simplify the message, but not simplify too much”.
Oh you mean something like this, uttered literally moments ago:
- LACKER SAYS UNEMPLOYMENT THRESHOLD CLOSE TO OBSOLETE
Thank you Fed for admitting the whole premise behind the injection of over $1 trillion in the capital markets, the Fed’s “target” of 6.5% unemployment, was really a bizarro bullshit joke perpetrated on the common man, when in reality the threshold was 1900 on the S&P. Or 2000. Or 3000. Or pick some arbitrary nominal number, where people confuse paper assets inflation with real wealth.
But don’t worry, it’s the “overconfidence” that did us in…
And then, on to regrets – because Bernanke has a few:
“We could have done some things on the margin to mitigate somewhat the crisis.”
“Although we have been very aggressive, I think on the monetary policy front we could have been even more aggressive.”
You heard that, the $4.1 trillion balance sheet is nowhere near enough. The Fed could have blown up the final bubble even more! Because that’s what you are taught on Clown Keynesian school.
But wait, because the punchline beckons:
“My natural inclinations, even if it weren’t for the legal mandate, would be to try to help the average person,” Bernanke said today in his first public remarks since leaving the Fed in January, referring to the central bank’s mandate from Congress to ensure full employment and stable prices. “The complexity though arises because in order to help the average person, you have to do things — very distasteful things — like try to prevent some large financial companies from collapsing.”
“The result was there are still many people after the crisis who still feel that it was unfair that some companies got helped and small banks and small business and average families didn’t get direct help,” Bernanke said. “It’s a hard perception to break.”
So there it is: the system crashed because we were “overconfident” – nothing to do with system merely having gorged on the reactionary excess to the popping of the dot com bubble – but Bernanke is 100% certain he could have done more to help the average person, because the Fed’s balance sheet trickle down eventually works. And let’s not forget the “overconfidence” about containing inflation in 15 minutes or less. That one will be hilarious to watch unwind.
* * *
So how much does such profound brilliance cost?
Bernanke received at least $250,000 for his appearance.
Or, in other words, more than he was paid for one full year as Fed chairman.
And that, ladies and gentlemen, is a wrap.