What Did Ben Know and When Did He Know It?

02/02/2010 1:00 pm EST

Focus: MARKETS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Forecasts & Strategies, says Fed chairman Ben Bernanke may have had premonitions that a financial crisis was coming.

Did the Federal Reserve chairman Ben Bernanke know in advance that a financial crisis was coming in 2008?

In an interview for Time magazine’s Person of the Year issue, Bernanke denied knowing that anything serious was amiss. Yet three years ago, I was in the audience at a luncheon sponsored by the American Economic Association (AEA), the annual gathering of professional economists.

As he talked, I noticed that he used the words “panic,” “crisis,” and “stress” over and over again. I reported [here]: “Anyone reading between the lines could understand that Bernanke is worried about a financial storm ahead…In his speech, Bernanke used the terms ‘crisis,’ ‘panic,’ ‘threats,’ ‘stress,’ and similar words at least 36 times.”

I met up with the Fed chairman again last month at the AEA meetings in Atlanta, where Bernanke gave another speech. Before his talk, I showed him a copy of his 2007 address, circling all of the “panic” and “crisis” words in his talk. “Did you have a premonition that a financial crisis was coming?” He stared at me stoically and smiled. He was noncommittal.

In his new talk, Bernanke denied that the Fed’s low-interest rate policy in 2002-04 caused the housing bubble or the financial crisis. The housing boom was global, he said, and couldn’t be blamed on US monetary policy.

Bernanke, at last, did take some responsibility for the lack of proper banking standards that led to the housing crisis. According to Bernanke, the Fed took steps to regulate the subprime mortgage market, but the new regs were “too little, too late.”

Indeed, the evidence is clear now that the banks and mortgage companies in the United States and the United Kingdom were alone in their folly to eliminate underwriting standards in the real estate market. Countries such as Canada, Australia, and New Zealand refused to permit such lax banking and mortgage business.

After his talk, I asked: “Mr. Bernanke, foreign central banks like Bank of India and Bank of China are now buying tonnes of gold. Is this a sign that foreigners are losing faith in the dollar-based world monetary system?”

Again, he had a “What, me worry?” response. “The world financial system is sound,” he responded. He expressed no concern about the dramatic rise in the price of gold since he became chairman.

If Ben Bernanke were the CEO of a major US corporation, he would be fired for such dereliction of duty. In 2007, he repeatedly assured Congress and the public that the Fed was alert to any economic problems that might arise.

“To make crises less likely,” Bernanke said in his 2007 AEA speech, “over the years the Federal Reserve has worked effectively with the Congress, other supervisors, and financial market participants to develop statutory, regulatory and other measures.”

The Fed has worked “effectively” to prevent crises? Give me a break.

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