Ben Bernanke, the Newest Avenger

Ben Bernanke’s announcement Thursday that the Fed would keep easing money sent the stock market soaring, but more important was his declaration that there is only so much the Federal Reserve can do.

The Fed’s latest move, approved by the policy-setting Open Market Committee, will buy a total of $85 billion in bonds every month, including $40 billion per month of mortgage-backed securities. This pumps vast sums into the economy. It is the equivalent of printing money.  Bernanke’s hope is to drive down interest rates generally, especially on home mortgages.

The Fed will also extend its policy further into the future and keep interest rates close to zero through 2015. But as Bernanke himself put it, monetary policy alone can’t fix what’s broken. The more important tool in a severely depressed economy is fiscal policy. And here is where Bernanke is truly playing against type.

The usual script calls for a Fed chair to demand fiscal tightening in exchange for liberal interest-rate policy. It’s what Alan Greenspan did in his 1993 deal with Bill Clinton. But Bernanke refuses to play that role. At a high-profile speech at the Fed’s Jackson Hole conference August 31, the Fed chair warned against too much fiscal tightening. He has refused to be the instrument of the party of deficit hawks.

Bernanke has also irritated conservatives by calling for the Obama administration and Congress to do more to fix the mortgage mess. Very low interest-rate mortgages are great for those who can get them. But the tens of millions of American homeowners whose houses are worth less than the current mortgages on them can’t qualify. A proliferation of small-bore programs that are voluntary to bankers, such as HAMP and HARP, has made only a small dent in the problem because serious reduction of principal owed is mostly unavailable.

In dealing with the crisis, Bernanke is a very different sort of central banker than his European counterpart, Mario Draghi. Last week, Draghi also cheered financial markets by declaring that the European Central Bank would buy unlimited quantities of government bonds, as necessary, to prevent a collapse of the euro. But he then completely undercut the benefits of that policy by insisting that any nation participating in such bond purchases must submit to an austerity program.

Draghi is nominally independent, but in practice he can only go as far as Germany’s Iron Chancellor, Angela Merkel permits. Bernanke, by contrast, is genuinely independent and reports only to the Open Market Committee, which backed his latest decision by a vote of 11 to 1.

The deficit hawks have tried to enlist Bernanke, but he isn’t playing and there is no counterpart of Chancellor Merkel to demand fiscal quid pro quos. The latest caper of Pete Peterson, Erskine Bowles, and company is a $50 million to $100 million corporate-funded campaign led by JPMorgan’s Jamie Dimon and 100 corporate CEOs pressuring for a grand bargain to cut the deficit.

There is no such high-powered committee lobbying for more government spending, which is what the economy needs. Bernanke can hint at that with metaphors like the “fiscal cliff” but won’t quite say it. Imagine if he did!

The last thing the country needs is corporate America dictating a perverse recovery policy. Jamie Dimon and his friends have already done quite enough, thank you.

In a recent piece in The New York Review of Books, Jacob Hacker and Paul Pierson cite a fascinating poll done by political scientist Larry Bartels and colleagues showing that the wealthiest Americans put deficit reduction and tax cuts ahead of jobs, while most Americans put jobs first. We already knew that, but this is research confirmation by respected political scientists.

It is a mark of just how far the country has moved to the right that the most effective voice for a strong recovery policy today is the chair of the Federal Reserve, a person first appointed by George W. Bush, and a professed admirer of Milton Friedman, as well as someone whose role usually requires him to be the most inflation-phobic person in the room.

But Bernanke evidently has a learning curve. Would that other leaders did.

Comments

This is gonna work as well as QE1, QE2, QE3, QE4 etc.. As soon as you see the stock market jump, you know the middle class is getting the short end of the stick. 93% of all stock is owned by the top 20% and 80% of the stock income goes to the top 5%. They love these programs, but it will do nothing for employment in the near term, if ever. $85 billion a month? That's another $1 trillion per year. Let's just take that money, add it to the stimulus then give to employers in the form of vouchers to hire and pay the 20 million unemployed people @ $31,250 a year. It is much more direct and a sure way to get people back to work.
Dollars $2,500,000,000,000
Unemployed people 20,000,000
Per person $125,000
4 years employment $31,250

Chairman Bernanke has indeed done well within the understood bounds of his role to fight inflation much harder than promoting full employment while refusing to go along with the reckless and callous austerity program of the conservatives. The mainstream newsmedia has never pushed the following juxtaposition of facts into prominence. The Panic of 2008 destroyed $12-$13 TRILLION of household wealth (39% of it) plus 8.5 million jobs. The 2 stimuli totaled less than $1 Tillion misguided for failure. No way that could make up for $12-$13 Trillion lost, but it probably did save a couple million jobs. The Fed then lent the gambling banks at super-low interest amounts tallied variously at $7.7 Trillion (Bloomberg) $16.1 Trillion (GAO Report 11-696, 7/10) or $29 Trillion (Working Paper, Levy Institute Bard College.) THAT"S what saved some millions of jobs in the Mega corporate non-Wall Street economy, preventing complete liquidity freeze and probable world depression.

Bernanke has urged more be done but not explicitly stated what needs be done. This would be for Congress to create by keystroke only, enough "United States Notes," greenbacks, GOVERNMENT MONEY CREATED WITHOUT TAKING DEBT(!). This money the government could loan to mortgagors to payoff their underwater arrears, to refinance at extremely low rates, students college loans, to help small businesses grow and hire, by subsidizing wages for new hires and to help individual inventors and entrepreneurs. It's called controlled, targeted "reflation." America survived as a nation creation of government money in the Revolution and Civil War. Roosevelt and Congress had the authority to do this in 1929, and their "stimuli," the New Deal programs were helpful. But they didn't do a massive Greenback stimulus and the Panic of 1929 turned into the Great Depression of 1929 - 39, ended only by preparation for WW2. We're 4 years into the 2nd Great Depression now.

If you really think vastly expanding the money supply is a good idea I suggest you read "When Money Dies" by Adam Fergusson.

If you really think vastly expanding the money supply is a good idea I suggest you read "When Money Dies" by Adam Fergusson.

Reality, or at least an ability to make 'sense' of our deficit with respect to GDP, shows that in good times or bad, or recession, depression, bubble or boom, total government debt as a percent of GDP is increasing. Since the days of FDR we have ridden an ever higher wave of 'owing' - to ourselves (SS), to others (bonds and treasuries) and to our children (taxes). Over time this increase in debt increases - it never retreats, is never paid off. Just a larger and larger percentage. Yet still the only answer to our current situation (and all 'current' situations that seem to occur more quickly) is to increase that debt, increase that debt to GDP percentage. After watching and listening to this refrain year after endless decade I've come to realize that it is hopeless, that this debt will continue to expand until under its own weight it implodes. Those that would advise us have no better vision. They never did. They never will.

In an earlier comment someone talked about FDR and 1929 measures not working - this is an example of historical ignorance. FDR was elected in 1932, not 1928 or 1929 and did not take office until Mach 1933. Tthe time between election and office assumption was larger because of the 19th century transportation realities.

On to the issue at hand. A fed gov jobs program financed by a modest financial transaction tax (FTT) which, I am very happy to say, will be proposed soon. A serious FTT would raise $350 - 750 billion (it depends upon your guestimate of the impact on high frequency trading (HFT) - and thus the extent of trade suppression)
. Even at the lower levels we could create a fed gov jobs program that would put 750,000 - 1,000,000 people to work; at the upper levels we could put almost 2 million people to work. And the trade off? Fewer 20 somethings paid $1 - 2 million for stealing $$ from real people trying to provide for sending their children to college, living ok in retirement, having health care in their declining years. All the things that the top 1% say F... you to. Time for the guillotine.

The FTT will never happen. There is no law that says securities have to be traded in the United States. A FTT would simply result in the NYSE moving to someplace like Toronto. Furthermore, NYC would lobby against any such tax to avoid losing its lucrative financial sector.

What nobody seems to mention is that if Congress had passed Obama's jobs bill - it would been far more effective and cost less in the long run that QE3. It just appears that QE does not cost the tax payer anything, but actually it does in terms of the value of the dollar. Not just the cost, but a direct stimulus by the government is also more effective.

Bernake is basically expanding the money supply, what in earlier times would have been called running the printing presses. It worked really well in Germany in the 1920's. I'm equally hopeful this time.

Don't forget Mugabe's roaring success in Zimbabwe a few years ago. Most of the people in the country were billionaires (literally). The only problem was a loaf bread cost a trillion.

If I print money, I am a counterfeiter and guilty of a crime. Ben can legally print all the cash he wants for all his friends and no one can do a damn thing about it. In God we trust ... and gold ... because even the Fed can't spin straw into gold.

If Bernanke is trying to destroy what is left of the middle class in the US, he's picked the perfect policy to do it. Money printing (aka currency depreciation) will NOT create incentives for businesses to expand and hire. Money printing WILL drive up the price of oil and food. The rich don't care about the price of gas and groceries but everyone else does. The poor will suffer the most under Bernanke's Mugabe-lite economics.

The Dow jumped 200 points after the Fed's QE announcement. This great news for the top 20% that own 90% of the equity. I'm sure the other 80% would rather have a job and cheaper food.

Money printing has NEVER brought prosperity to ANY country EVER! It hasn't worked in the past and it won't work now.

Bernanke made a show of no confidence in the Obama economy when he extended these interest rates through 2015.
What we just witnessed was another Bailout/Stimulus for Bondholders of Mortgage backed securities and Banks that the Taxpayer will be left holding the bag for. Bernanke succumbed to political Democratic pressure after they were screaming for a pre-election bailout.....If you think 2008 was bad , just wait.......If Obama thinks he inherited a mess, it will look like a cake walk compared to what Romney might be inheriting.

I fervently stick with the notion that Bernanke is doing what it takes to revamp the economy, and not merely orchestrating a show of "no confidence in the Obama economy". Stringent supporters of Romney are adept to believing that the economy is badly stampeded by Obama, and forgetting that the innocent man shouldered the burden from the eight years of bad handling. That Bernanke 's current "save us" action on the economy by the extension of interest rates through 2015 would open up a cankerworm of "Bailout/Stimulus for Bondholders of Mortgage backed securities and Banks" is a fallacy. Someone has to do something, and the moves of Bernanke are nothing more than what the economy deserves to make it begin to look radiant. If Romney takes the Presidential hot seat in November, Bernanke's economic action at the moment would provide a pleasing carpet for him to step on inside the Oval Office.

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