Hating on Ben Bernanke

Last week Ben Bernanke, Federal Reserve chairman, announced a change in his institution’s recession-fighting strategies. In so doing he seemed to be responding to the arguments of critics who have said the Fed can and should be doing more. And Republicans went wild. Now, many people on the right have long been obsessed with the notion that we’ll be facing runaway inflation any day now. The surprise was how readily Mitt Romney joined in the craziness. So what did Mr. Bernanke announce, and why? The Fed normally responds to a weak economy by buying short-term U.S. government debt from banks. This adds to bank reserves; the banks go out and lend more; and the economy perks up. Unfortunately, the scale of the financial crisis, which left behind a huge overhang of consumer debt, depressed economy so severely that the usual channels of monetary policy don’t work. The Fed can bulk up bank reserves, but banks have little incentive to lend the money out, because short-term interest rates are near zero. So the reserves just sit there. (source: Paul Krugman – NYTimes – 17/09/2012)

Fed’s response to this problem has been “quantitative easing,” a confusing term for buying assets other than Treasury bills, such as long-term U.S. debt. The hope has been that such purchases will drive down the cost of borrowing, and boost economy even though conventional monetary policy has reached its limit. Sure enough, the last week’s Fed announcement included another round of the quantitative easing, this time involving mortgage-backed securities. The big news, however, was the Fed’s declaration that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.” In plain English, the Fed is more or less promising that it won’t start raising interest rates as soon as the economy looks better, that it will hold off until the economy is actually booming and (perhaps) until inflation has gone significantly higher. The idea here is that by indicating its willingness to let the economy rip for a while, the Fed can encourage more private-sector spending right away. Potential home buyers will be encouraged by the prospect of moderately higher inflation that will make their debt easier to repay; corporations will be encouraged by the prospect of higher future sales; stocks will rise, increasing wealth, and the dollar will fall, making U.S. exports more competitive. This is very much the kind of action Fed critics have advocated, and that Mr. Bernanke himself used to advocate before he became a Fed chairman. True, it’s a lot less explicit than the critics would have liked. But it’s still a welcome move, although far from being a panacea for the economy’s troubles (a point Mr. Bernanke himself emphasized). And Republicans, as I said, have gone wild, with Romney joining in the craziness. His campaign issued a news release denouncing Fed’s move as giving the economy an “artificial” boost, he later described it as a “sugar high”, declaring “we should be creating wealth, not printing dollars”. Romney’s language echoed that of the “liquidationists” of the 1930s, who argued against doing anything to mitigate the Great Depression. Until recently, verdict on liquidationism seemed clear: it has been rejected and ridiculed not just by liberals and Keynesians but by conservatives too, including none other than Milton Friedman.

“Aggressive monetary policy can reduce the depth of a recession,” declared George W. Bush administration in its 2004 Economic Report of the President. And the author of that report, Harvard’s N. Gregory Mankiw, has actually advocated a much more aggressive Fed policy than the one announced last week. Now Mr. Mankiw is allegedly a Romney adviser, but the candidate’s position on economic policy is evidently being dictated by extremists who warn any effort to fight this slump will turn us into Zimbabwe, Zimbabwe I tell you. Oh, and what about Mr. Romney’s ideas for “creating wealth”? The Mitt Romney economic “plan” offers no specifics about what he would actually do. The thrust of it, however, is that what America needs is less environmental protection and lower taxes on wealthy. Surprise! Indeed, as Mike Konczal of the Roosevelt Institute points out, the Romney plan of 2012 is almost identical, with the same turns of phrase, to John McCain’s plan in 2008, not to mention the plans laid out by George W. Bush in 2004 and 2006. The situation changes, but the song remains the same. So last week we learned Bernanke is willing to listen to sensible critics, change course. But we also learned that on economic policy, as on foreign policy, Mitt Romney has abandoned any pose of moderation and taken up residence in the right’s intellectual fever swamps. 

Acerca de ignaciocovelo
Consultor Internacional

2 Responses to Hating on Ben Bernanke

  1. Professor Uziel Nogueira says: Prof PK is right on a point. Neither Obama nor Romney have the magic formula to reduce rapidly the unemployment rate. However, PK is DEADLY wrong on the FED printing dollars to solve the problem. If printing TONS of money were the solution to foster economic growth and prosperity,

    Latin America would be the most developed region in the world today.

    The FED’s Argentine monetary policy has two major downsides. First, it creates few winners and millions of losers. The winners, the usual 1% posse of banks, rich folks and transnational enterprises that get money for nothing and profits for free. The losers, the 99% crowd of middle class investors hit by a triple whammy i.e., depressed house prices, negative yields on savings and a devalued currency. Second, the loose monetary policy will lead inevitably to higher inflation rate where the poor and middle class are the hardest hit. As they say in Argentina, is bred for today and hunger for tomorrow.

    The bottom line: Obama-Bernanke’s monetary policy is the largest transfer of wealth ever made in the US. When it is over, the US will resemble Mexico. Few millionaires like Carlos Slim and millions of middle class poor.


  2. We are reaching — or may already have passed — the practical limits of “economic stimulus.” Last week, the Federal Reserve adopted an open-ended bond-buying program of $40 billion a month to goad the economy into faster growth. But even before the announcement, there was skepticism that it would do much to lower the unemployment rate, which has exceeded 8 percent for 43 months. The average response of 47 economists surveyed by The Wall Street Journal was that a similar program might cut the jobless rate 0.1 percentage point over a year (…..) Next, consider government spending and tax cuts. President Obama’s first stimulus totaled about $833 billion, says the Congressional Budget Office. But the true stimulus also includes subsequent tax cuts and spending increases plus “automatic stabilizers.” These refer to the budget’s tendency to swing into deficit during a recession, because tax revenues fall and spending on unemployment benefits and other safety-net programs rise. Budget deficits broadly measure stimulus. From 2009 to 2012, they’re about $5.1 trillion. What impresses is this: the massive stimulus programs and the meek recovery. How much worse things might have been without stimulus is an open question. Economists argue ferociously, and the numbers vary widely. For example, the CBO estimates that Obama’s initial stimulus has created between 200,000 and 1.2 million jobs in 2012. But whatever the benefits, massive stimulus clearly hasn’t triggered a monster recovery. Explanations abound. One is that the stimulus programs were still too timid. If we’d done more, we’d be in better shape. Another theory is that the trauma of the financial crisis and recession made households and businesses deeply cautious; they postponed spending, paid down debt and hoarded cash. Magnifying their anxieties were persisting threats: Europe’s financial turmoil; the stubborn housing bust; the uncertainty of public policy (Obamacare’s impact, the debt ceiling fight, and now the “fiscal cliff”).

    To these might be added a perverse possibility: the stimulus programs themselves. Intended to inspire optimism by demonstrating government’s commitment to recovery, they could do the opposite. If consumers and companies interpret them as signaling that the economy is in worse shape than they thought, they might retrench even more. Some stimulus benefits would be offset.

    There is a desperate air to Bernanke’s latest move. At best, it will reinforce a long-awaited housing revival. At worst, it will founder on obvious problems. How much lower can the Fed drive long-term interest rates? How much money can the Fed shovel into the economy without rekindling inflationary expectations and behavior? The Fed is on the brink of moving beyond what it understands and can control.



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