Ben Bernanke's Nightmare

Like Alan Greenspan before him, the current Federal Reserve chairman has injected massive amounts of money into the system in order to save it. But this is at the risk of being held responsible for the bubble’s eventual burst …

He couldn’t close his eyes; it was three o’clock in the morning. The man tossed and turned in his bed, unable to forget his nightmare. He became Alan Greenspan! He, the savior of the U.S. economy and global finance, would end up on the tribunal of economic history as the inflator of the biggest speculative bubble of all time!

A drop of cold sweat beaded on Ben Bernanke’s forehead. Indeed, his story and Alan Greenspan’s are strangely similar. Not only because, seven years ago, Ben sat in Alan’s seat, as former chairman of the U.S. Federal Reserve, the cradle of global economic power as it was, seeing that the Fed makes the world currency that is the dollar. They both grew up in Jewish families in “middle class” America. They are fans of baseball. They played the saxophone, though Alan had more talent than Ben, playing in a jazz orchestra for part of his life. They studied economics. But it is Ben who wears more hats: a doctorate at 26, compared to a doctorate at 51 by his senior, president of the economics department at the prestigious Princeton University, author of an essay and a best-selling manual. Both led the council of economic experts under a Republican president before becoming the head of the central bank of the United States.

Their routes intertwine more in their paths to the presidency of the Fed. Shortly after their nominations, both endured a terrible financial crisis, for which they were perfectly prepared. Greenspan, appointed Aug. 11, 1987, immediately requested the Fed’s team of economists to work on what he should do in case of a stock market crash. On Oct. 19 of that year, the Dow Jones Industrial Average fell 23 percent. The Fed immediately injected huge amounts of money into the financial system to avoid a collapse. Bernanke has spent his entire academic life studying what to do to fight deflation. Appointed chairman of the Fed on Feb. 1, 2006, he began to implement these ideas as soon as 2007, when the first cracks in the U.S. housing market showed. The bankruptcy of Lehman Brothers in 2008 allowed him to go further until he ordered the printing of bills to buy public debt.

But life is unfair, Bernanke thought, huddled under his blanket. The 1987 crash was like flogging a dead horse. The U.S. economy was not so overrun with debt. It would suffice to short-circuit the markets in case of too strong a fluctuation of prices to then limit their volatility. The injected money was quickly removed. Greenspan came out better from the incident. His next test came a decade later with the Internet bubble. Greenspan tried in vain to calm his spirits, speaking in 1996 of “irrational exuberance.” He failed. The price of Internet start-ups went up until the explosion of 2000, which caused a loss of $5 trillion in companies’ market value. Under the leadership of Alan Greenspan, the Fed lowered interest rates sharply. The cash created then fueled a new bubble of both real estate and banking — and a huge one at that. In 2006, Alan stepped down in favor of Ben, to the cheers of the crowd. In 2008, the bubble burst — and Greenspan was ousted from his pedestal like a vulgar statue of Stalin in Eastern Europe in the late 1980s.

It’s really unfair, said Bernanke, because contrary to Greenspan, who passed as a hero for 20 years, he had the right to the true crisis since his debut in the Fed. Since 2008, he injected massive amounts of money into the financial system to save it. And after several years of injecting money, it inflated a new bubble, exactly as in the early 2000s. A bubble of public obligations because the long-term interest rates are at their lowest (which automatically means that the price of the obligations is at its highest); a bubble of actions because the Dow Jones reaches new heights and market capitalization of U.S. companies has never been as high as today … except in 2000 and 2007. So much so that Bernanke felt obliged last week to discuss “reaching for yield […] which may affect asset prices” — his way of speaking of irrational exuberance.

This bubble, therefore, will inevitably burst. And Bernanke will also inevitably be held accountable, as Greenspan was responsible for the previous bubble. But deep down, Ben has long since known that he is another Alan. Or rather, that Alan was Ben! In 1999, Alan Greenspan was marked by the intervention of the academic Ben Bernanke, showing that it was dangerous for a central banker to want to fight against a speculative bubble. In the early 2000s, Bernanke, becoming one of the governors of the Fed, sounded the alarm on the risks of inflation. In other words, he played a key role in inflating the bubble of the 2000s …

A beautiful spring light filtered through the curtains. Ben Bernanke said he was finally able to sleep for a few moments. In two days, he would testify before Congress. He was still chairman of the Federal Reserve. Everything was fine.