Nonmystery wrapped in a cellophane enigma

New York Times economic columnist David Leonhardt raises a worthy question about Fed Chairman Ben Bernanke’s likelihood of detecting a new bubble in the making, given his and his then-boss’ failure to recognize the housing bubble for the economy-trashing monster it was.

Unfortunately, Leonhardt fumbles around what was going on as the housing bubble grew to stupendous proportions, with the Fed standing by uttering bland assurances everything was within normal limits.

In 2004, Alan Greenspan, then the (Fed) chairman, said the rise in home values was “not enough in our judgment to raise major concerns.” In 2005, Mr. Bernanke — then a Bush administration official — said a housing bubble was “a pretty unlikely possibility.” As late as May 2007, he said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.”

The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble?

With thanks to Kevin Phillips, who nailed this in his excellent book, Bad Money, a year and a half ago, we know the why and wherefore of all this.

Greenspan was very interested in helping Bush & Co. “grow the economy” at a time when the economy kept trying to stall before going belly up. The problem was that in 1999-2000, the tech bubble had burst, costing a whole lot of investors billions, as start-ups that had yet to produce a product or service actually for sale, despite awarding secretaries big bonuses and making programmers fabulously rich, went bankrupt by the dozens. Next thing you know, the economy tipped over into recession.

The economy took another hit in the wake of the 9-11 attacks. But with a lot of help from the most rabidly pro-big-business administration ever, Wall Street and corporate America pulled out of the dive in reasonable time. For laid-off workers, recovery limped ahead at a glacial pace.

This set off alarm bells at 1600 Pennsylvania Ave., where the occupant in chief was painfully aware of what a sick, dragging-its-sorry-butt economy can do to a president seeking re-election. George W. Bush had sworn he wouldn’t let that happen to him the way it had happened to his one-term father a decade earlier. That compulsion to keep the economy up and running had much to do with Bush 43′s series of too-big tax cuts.

Greenspan undoubtedly wanted to help. But with jobs and whole industries being shipped out to China, Korea and other foreign destinations at a hectic pace, with computerization and advanced communications eating jobs like a kid emptying a box of popcorn, his options were limited.

What “The Oracle,” as Greenspan was dubbed for allegedly being The Greatest Economic Soothsayer of All Time, came up with was — Ta Da! — another bubble. The formula was simple: two parts easy credit facilitated by low-low interest rates, plus an administration-pushed idea for making the U.S. a nation of homeowners, in large part by extending home loans to people wildly unqualified, would stimulate an economy known to be kept from going under water by consumer spending and little else.

Big, unregulated, de-Glass-Steagallized banks were all for it, coming up with a cockamamie mathematical formula proving bad loans could be made good — and fabulously profitable if sold off to suckers quickly enough — in the finest tradition of Medieval alchemists, whose job it was to turn lead into gold.

After all hell broke loose, sending the economy crashing in ways not seen for 80 years, Greenspan had the integrity to admit he had screwed up. He explained that he had really believed the giants of Wall Street and high poobahs of the nationwide financial industry would behave responsibly and honestly, with due regard for their fiduciary obligations (cue Vienna Boys Choir singing solemn hymn). But alas, he learned his respect and trust had been misplaced (clash cymbals).

Ahem.

So, to save Leonhardt and others mystified about all this the expense and trouble of reading Phillips’ more-precise and erudite explanation, we can round the problem out to Greenspan having an ideological and political blind spot big enough to drive a global economic meltdown through. Think of it as a multi-trillion-dollar oops.

As to whether Bernanke’s Fed should be trusted with more power, in hopes that might prevent future such catastrophes, we say no. That’s not because the Fed as an institution is incapable of detecting and acting promptly to prick bubbles before they grow to catastrophic proportions.

The problem is that we don’t think Bernanke really gets why the last bubble grew as it did, and burst with such terrible consequences for hundreds of millions of people the world over. We haven’t heard anything from him spelling out his understanding of the ideological blind spot and political sympathies that played a key role in creating the nation’s current economic miseries — the bankruptcies, foreclosures and 10 percent unemployment.

So, until we get a Fed chairman who’s not a fine, upstanding disciple of the Chicago School of Economics, not a Republican-thinking, “grow the economy,” Wall Street-friendly nonregulator, we think Congress should look elsewhere for keeping the money changers from destroying the temple. Yet again.

Leonhardt would do well to read, or re-read, Phillips’ book.