Wednesday, 28 May 2008

The Meaning of the "Bernanke Doctrine”

The New York Times informs us that there is a new doctrine in town. It is called the Bernanke Doctrine. The president of the New York Fed described it as “the overpowering use of monetary policies and lending to avert an economic collapse”.

On one level, what we have here is the ex post facto rationalization by Bernanke’s sycophant underlings of his actions in the past several months. But there is a subtext to the story.

Firefighters use an overpowering supply of water – as well as fire retardant and explosives, if need be – to fight fires, but they have no “doctrine” about the use of these measures because the need is self-evident and thus, sanctioned.

The Bernanke Doctrine, by contrast, involves policy actions that might violate the by-laws of the Federal Reserve Board. “Over a frantic weekend in mid-March, Ben S. Bernanke rewrote the rule book as chairman of the Federal Reserve,” we are informed.

The rule book of the Federal Reserve is a technical document. It does not lend itself to being “re-written” by one man – and that, in haste. But that is precisely what Bernanke did. That conduct is now being telegraphed as the standing modus operandi of the Federal Reserve: if the rules stand in the way of needful actions, they go. That is the gist of The Bernanke Doctrine, the “whatever it takes” of the cornered men bent on getting themselves out of a tight spot.

The Times gave a crisis-made-the-man spin to the story – how the mild-mannered academic rose to the occasion, etc. The paper quoted the president of the Dallas Federal Reserve who said about Bernanke: “He’s developed a serenity based on a growing understanding of the hardball ways the system actually works. You can see that it’s no longer an academic or theoretical exercise for him.”

That is the critical point of the article, the insinuation that the working of the “real world”, where men play hardball, is beyond the grasp of the theoretical bull that is the official finance and economics; Ben S. Bernanke finally grew up.

With regard to the medley of smatterings that is the official economics and finance, that assertion is certainly true. But is not true that the actions of Bernanke and his European counterparts at the ECB and the BOE are beyond the realm of comprehension and thus, must be conducted in an ad hoc and fly-by-the-seat-of-the-pants manner. Quite the contrary. As market grow more complicated, the need for a theory to explain what is happening, i.e., what is changing, becomes paramount; we have seen how little an ad hoc, gut-feeling approach, the monetary equivalent of a frightened soldier emptying round after round into the bushes hoping to hit a target, accomplishes.

If Bernanke is the contemplative economist that he is touted to be, he must know that the financial system at some point will outgrow his ability to influence the events. That, more than anything else, requires a theoretical understanding of the system, of the kind you will find in Speculative Capital and in entries in this blog. The Credit Woes series offered a glimpse of what a real theory could do.

Bernanke will of course learn no such thing. He could not. A defining characteristic of the systemic risk is its inevitability and the destruction that precedes it, be it of the U.S Constitution, Federal Reserve by-laws or the long held codes of conduct in the world of business.