President Obama this week nominated Ben Bernanke for his 2nd term as chairman of the Federal Reserve. “Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside the box thinking that has helped put the brakes on our economic freefall,” Obama said.

Despite Obama’s flattery, Bernanke remains a dangerous threat to the economy and the US dollar. He has been wrong for four years, making many inaccurate predictions on important things leading up to the economic crisis. Thus, he was completely unprepared for it and the economy suffered as a result. Here is a list of some of Bernanke’s predictions:

In July 2005,
• He dismissed the idea of a bubble in the housing market.
• He contributed rising home prices to very strong fundamentals in the economy.
• He dismissed the worst case idea of a bursting housing sector and home prices falling substantially across the country.
• His version of a worst case scenario was simply slowing in the housing prices, maybe stabilizing prices. He felt this might slow consumption spending a bit, but it wouldn’t drive the economy too far from its full employment path.
• He did admit to some localized problems in housing when pressed, but he was confident bank regulations would pay close attention to the loans and underwriting and make sure they’re done right. He stated these local problems would affect the national economy.

In November 2006,
• He thought consumer spending would continue to grow and that the drag on the economy from the housing sector would gradually diminish.
• He cited motor vehicles sector may already be showing signs of strengthening to support his position on consumer spending.
• He thought the rate of decline in home construction should slow as the inventory of unsold homes is gradually worked down.

In February 2007,
• He expected moderate growth going forward.
• He didn’t see much indication that subprime mortgage issues would spill over.
• He stated the broader mortgage market and the lending side of that still seemed healthy.

In July 2007,
• He stated the global economy continues to be strong, support by solid economic growth abroad.
• He thought the US economy seemed likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008.

For more information on this list, including a video of Bernanke making these predictions, see http://mises.org/story/3588

Clearly, Bernanke has failed in his forecasting, which is crucial to policy making. It is unnerving to think he is the man in power, controlling the peoples’ money and thus the economy.

Even worse is the fact that Bernanke’s own institution, the Federal Reserve, was the root cause of the housing bubble and financial crisis. Greenspan inflating the money supply as greatly as he did distorted the market and caused these problems. Bernanke during this time was on the board of governors under Greenspan and was cheering on the inflation, earning him the nickname Helicopter Ben. With so much liquidity floating around and interest rates so low, it provided an artificial stimulant to the economy, not based on any real supply or demand. Inflation also distorts interest rates, which coordinate production and consumption decisions over time. The manipulated interest rates represented that the market had more resources than it actually did. This inflation, combined with the US government actively promoting and incentivizing home ownership, created the massive housing bubble. Yet, it was all artificial and the resources just weren’t there, meaning it was malinvestment. The housing sector was on an unsustainable path and it was only a matter of time before the stimulant wore off and the bubble burst.

It’s important to note that the economy had problems and was in bad shape at the same time it was seemingly the strongest and the most confident. The economy didn’t turn bad when the bubble burst, that was merely the time the economy was revealed for what it was.

Bernanke and the US government have failed to recognize this as the root cause of our economic crisis. Instead, he has focused on the symptoms of decreased lending, falling prices, unemployment, etc. What is his solution to treat these symptoms? The same thing that caused them in the first place: inflating the money supply in an effort to artificially stimulate the economy. As well as directly lend to different sectors of the economy, greatly expanding the Fed’s balance sheet, and forcing the American people to take on these risks. The malinvestments in the economy cannot be magically saved with more inflation or more debt, especially when those are the problems, so this will inevitably lead to another burst. You cannot borrow your way out of debt, no more than a drug addict can abuse his way to health. The longer we keep putting off the problems, the bigger this bubble grows, and the greater the pain will be when it bursts. The economy needs to absorb the losses and reallocate its resources in an efficient sustainable manner. Yes, this will be painful, but the free market would perform this quickly and the economy could then focus on getting onto a healthier sustainable path. Any overall growth in the national economy will either be artificial or despite the Fed’s efforts.

The only benefit of renominating Bernanke is “better the devil you know than the devil you don’t”. If Obama were to nominate a new Fed chairman, there would be a lot of uncertainty about the person and their monetary policy. Bernanke has been fairly extreme, but there have been plenty of calls for the Fed to do even more, including a negative fed funds rate.

So I remain unconvinced that a man who was incredibly wrong, blind to the problems, and has made the economy much worse is somehow worthy of praise. Bernanke remains the problem, not the solution. Look for him to continue to hold rates at their low levels for an extended period of time. His policies will continue to devalue the US dollar in the long term.