Nouriel Roubini had a July 25, 2009 op-ed in the New York Times which seems to have gotten passed over. In it, he argued that Ben Bernanke should be reappointed Chairman of the Fed. There are some specific and general things I would like to say about this piece.

First, Roubini buys into Bernanke’s view that the Great Depression was made far worse by a contraction in the money supply. While true in a general way, it misses the larger point. It is not just a question of how much money is out there. It is where that money goes that is critically important. Then (in theory) as now in fact, an undirected expansion of the money supply would only be used to attempt to reflate the speculative bubble that was responsible for the collapse in the first place. This is very different from the Keynesian view. Where aggregate demand falls because people are endebted or have lost their jobs, and aggregate supply increases because there are fewer buyers because of that debt and job loss, a deadly deflationary spiral can ensue. Supply contracts to catch up to declining demand. Prices are cut but so are wages and jobs. This leads to a further contraction in demand and so the need for further cuts on the supply side, and on and on. Keynes’ major insight was that the way to stop this spiral was to get money into the hands of those who would spend it and create demand, i.e. the un- and under- employed. The vehicle for this was the government because only the government had the money (by running deficits) and could direct it where it was needed. So Roubini is right that taking money out of the economy during the Hoover years of the Great Depression was a calamitous mistake, but he is wrong that simply increasing the money supply would have solved or mitigated the problem.

Having endorsed Bernanke, Roubini immediately qualifies that support but fails to notice the damning nature of those qualifications. He says that Bernanke supported Greenspan’s low interest rate policy for “too long and failed to monitor mortgage lending properly, thus creating the housing and credit and mortgage bubbles.” In other words, Bernanke supported the policies that led to the housing bubble and financial meltdown but he never saw either coming. With an endorsement like this, you have to wonder what a rejection would look like.

Then Roubini looks at Bernanke’s response to the bursting of the housing bubble.

First, he kept arguing that the housing recession would bottom out soon (it has not bottomed out even three years later). Second, he argued that the subprime problem was a contained problem when in reality it was a symptom of the biggest leverage and credit bubble in American history. Third, he argued that the collapse in the housing market would not lead to a recession

Actually it’s been 2 years since the housing bubble burst and 4 years since housing peaked. But as to Roubini’s points, he is saying that even after the bubble burst, Bernanke completely misread it. He didn’t understand the size of the problem or its consequences both for the financial industry and the wider economy. He even throws in Bernanke’s laughable line about how a savings glut in China was responsible for the US trade deficit with that country. Remember this is an endorsement.

Roubini is in the awkward position of saying both that Bernanke didn’t understand the scope of the problem but that he did act appropriately. Seriously, how is this possible? He asserts that in the summer of 2007 Bernanke drove the funds rate down to zero. What he doesn’t say is that it took him nearly a year and a half to do it and it had no real effect on restarting lending. But Roubini maintains the opposite. I guess this is a case of who are you going to believe, Roubini or your lying eyes? Continuing in this surreal vein, Roubini asserts, “For the first time since the Great Depression, the Fed’s role as lender of last resort was extended to investment banks.” And this was a positive? That the Fed was backstopping the greatest villains in this disaster and helping them continue their speculations?

Again this is one of the strangest endorsements I have ever read. So much of what is said is wrong and even more is left unsaid. Bernanke is praised for his role in dealing with Bear Stearns (the sweetheart deal with JPMorgan) and AIG (financial blackhole and the windfall which saved Goldman). Yet if you look at the dreck in the Maiden Lane vehicles that were created as part of the resolution of these two companies, these deals are going to end up even worse than they already appear. Roubini’s mention of AIG is interesting because at the same time that deal was being hashed out the fate of Lehman was being decided. It was the decision to allow Lehman to go into an uncontrolled bankruptcy that precipitated the financial meltdown. This was probably the most portentous financial decision of our times, and Roubini has absolutely nothing to say about it or Bernanke’s role in it. Indeed Bernanke’s failure (along with Paulson) to look at or understand the consequences of letting Lehman collapse is another instance of Bernanke having a front row seat at the theater and not seeing the play. Roubini also has nothing to say about the trillion plus dollars of crap the Fed has taken on to its balance sheet or Bernanke’s role in the forced sale of Merrill to Bank of America or his failure to acknowledge the insolvency of US banking or the complete lack of transparency in the Fed’s actions.

Despite all of this, Roubini credits Bernanke with averting a near depression. I think the jury is still out on whether depression was avoided or just delayed. What I see in Roubini’s endorsement of Bernanke is a variation on the tired assertion that what Bernanke did was better than nothing. The problem with this argument is that it ignores that if Bernanke had been up to his job, he could have acted much faster and more forceably to mitigate the consequences of the housing bubble, pushed for reforms and restructuring of the financial industry, and avoided the financial meltdown. Obviously, he did none of these things.

So why did Roubini endorse Bernanke? I can only guess. Edward Harrison at Naked Capitalism had a post recently in which he observed that financial forecasters can make their reputation about being right in a major prediction. Nouriel Roubini, Doctor Doom, has certainly done that. But Harrison went on to note that forecasters who then went on to make other major, against the current, predictions and who guessed wrong quickly lost that reputation. Perhaps Roubini now that his reputation is made has become more conservative. Or perhaps we are seeing here the ideology behind the predictions. There also seems to be a gentlemanly agreement among established economists not to attack or criticize each other too directly, an agreement that fortunately doesn’t extend to many economists who blog.

Whatever the reason, Roubini’s support for Bernanke is troubling. His arguments for Bernanke are either vacuous or distort the record. There has been discussion of late of a general failure in economics. The dominant school of economics however you wish to label it: Chicago, Friedmanian, neoliberal, Washington consensus was responsible for low Fed rates, the emphasis on monetary policy, the housing bubble, the paper economy with its securitization and exotic instruments, and, of course, eventually the meltdown. Even after all this, its adherents remain in denial, retain their positions in government, industry, and academia where they set the policy for problems they have shown again and again they do not understand. It is disappointing that Roubini has aligned himself with a failed economics and one of its principal failed practitioners, Ben Bernanke.