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Part I: "It's All Academic"
Part II: "Ignorance is Bliss"


The Dismal Science should emulate the Practice of Medicine and adopt its own version of the Hippocratic Oath.  At minimum, the Federal Reserve should require a similar pledge of fealty to be taken by its Board of Governors. 

“I will prescribe regimens for the good of my patient according to my ability and my judgment and above all, do no harm to the economy.”

Bernanke Prescribes Liquidity as the Cure for Excessive Leverage and Overvalued Assets

As is clearly demonstrated by Bernanke’s own comments and testimony, the Federal Reserve Chairman has consistently failed to understand economic reality going back to at least 2005. 

The event which sparked his first semblance of recognition was the Credit Crisis which emerged in August 2007 despite his protestations.  The Chairman’s perspective changed from that of persistent denial into a mistaken belief that historic Federal Reserve action was required to rescue the economy. 

Bernanke reacted reflexively, drawing on his academic understanding of the Great Depression, and with the mistaken belief that interest rates were relevant to solving the expanding economic malaise. 

The Fed Chief’s strategy for solving the crises was to lower interest rates, in an uncoordinated fashion, quickly and consistently in an effort to inject liquidity into the financial system.  As reported by the New York Times, Bernanke’s interest rate cuts “were intended to counteract the tight credit market and spur growth”.

But at its core the Housing Collapse and expanding Depression was never about liquidity nor was it caused by the Credit Crisis.  Decreased liquidity manifest itself as a result of the forces battering the economy, but the Credit Crisis was a symptom of the economic downturn, not the cause.  The Credit Markets simply recognized reality before Ben Bernanke did.

Interest rates have no bearing on solvency concerns triggered by overvalued assets and excessive leverage.  To this end interest rate cuts were completely ineffective in stemming or curing the problems afflicting the economy.  The Federal Reserve quickly exhausted its primary stimulus tool as overnight interest rates approached zero percent.  Bernanke failed to achieve a stated goal that was never in fact realizable.

“Bernankenomics” Makes Things Worse

While accomplishing nothing positive, the dramatic interest rate cuts did do plenty of harm to a vulnerable economy.

• The U.S. dollar collapsed in sustained fashion as the direct result of the Fed’s overtly stated policies and realized interest rate cuts

• Rapid interest rate cuts caused instability and volatility.  Expectations of short term inflation were created

• The cost of dollar denominated foreign goods rose quickly contributing to the realization of the aforementioned spike in short term inflation

The rapidly depreciating dollar caused oil prices to spike.




The steady, predictable pace of oil’s appreciation attracted the recognition of institutional asset managers seeking to capitalize off momentum and invest in technically attractive assets.  The conceptually appealing narrative of global oil shortages as a result of the economic maturation of China and India served as a theoretical, fundamental justification for the price run-up. 

In fact, the Global Economy was sliding into the worst Depression since the 1930s and the “shortage” was pure fiction. 

In March of 2008 I noted with amazement that the only cause for oil’s impressive run was the Federal Reserves’ inappropriate actions and indicated that a collapse was inevitable whenever momentum faltered. 

Oil Prices Bring the Economic Collapse Home

The collapsing dollar had a real and material impact on the economy and more importantly on the perception held by “Main Street”.  Until the spike in gasoline prices the average person who didnt read the Wall Street Journal had only a fleeting understanding that the economy was imperiled.  $4 a gallon gasoline directly impacted the lives of consumers, undermined consumer confidence and dramatically accelerated the collapse of the U.S. auto industry.







I do not dispute that Main Street would have eventually recognized the weakening economy.  GM’s failure was inevitable regardless of the Federal Reserve devaluing the U.S. dollar and driving up the price of gasoline.  But the timeline, pace and impact of these events were not predetermined.

There is no doubt that Bernanke’s policies created unnecessary short-term inflation and volatility within the value of the dollar, the price of oil, the cost of gasoline, consumer sentiment and consumer spending, which were each economically damaging. 

Bernanke’s realization that the collapsing housing market was dragging down the entire economy elicited a tragically misguided response.  His reflexive reaction, born from a lack of understanding, was an unmitigated disaster.


Link to Part IV:  “Misguided Manipulation of the Housing Market”