A QUESTION FOR THE CHAIRMAN
We attended Chairman Bernanke’s lecture last Friday at Princeton University, primarily because there was going to be open Q&A. As it turns out, despite our eagerly raised hand we were not called, the questions that were asked were beside the point, and in any event his talk steered far away from monetary policy. (His speech evaluated the study and practice of economics in light of the overall failure by the economic community to predict the nature, timing or severity of the financial crisis.) So we didn’t learn anything that we didn’t already know.
Unfortunately, what we don’t know is worth knowing. Our interest is in the newly-opened door to another round of Large Scale Asset Purchases (LSAPs). The first round increased the Federal Reserve’s balance sheet to over $2 trillion, and the Fed had started to float trial balloons about possible exit strategies. But the weakening of the economy, the Fed’s announced policy of reinvesting principal payments from its portfolio of Agency MBS and the FOMC’s pledge to “provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate,” have brought back the focus back to LSAPs as the main tool to go after long-term rates. Let’s focus on one passage from his Jackson Hole speech in this regard: “[T]he evidence suggests that the Fed’s earlier program of purchases was effective in bringing down term premiums and lowering the costs of borrowing in a number of private credit markets.” This is true. Research from the New York Fed called “Large-Scale Asset Purchases by the Federal Reserve:Did They Work?”found that the reduction in the term premium on 10-year Treasurys as a result of the announcements and execution of the first LSAP was between 30 and 100 basis points. The graph below from the paper, written by Joseph Gagnon, Matthew Raskin, Julie Remache and Brian Sack, shows the cumulative effect of one-day responses in basis points for a number of markets to the baseline announcements regarding the first LSAP (the initial announcement, Bernanke’s 12/1/08 speech and certain FOMC statements), the baseline announcements plus all FOMC statements and minutes over the period, and the same baseline events using cumulative two-day measurements.
Bernanke continued his Jackson Hole speech, and said he believed “additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions.” This brings us to the question we would have asked Chairman Bernanke. “Mr. Chairman, the problem in the United States is not rate or financial conditions. Corporations are borrowing in the credit markets at advantageous rates—for example, IBM at 1% and Microsoft at 7/8% for three years—and the funding markets are liquid. What does the Fed do if it expands its balance sheet to $4 trillion or $6 trillion, drives the 10-year yield down to 2% or less, but unemployment still stands around 10%?” The reason we would ask is the first slug of quantitative easing has not been successful in improving the unemployment rate, as the graph below shows. Moreover, there is the risk of diminishing returns for each round of LSAPs.
If we had gotten a chance to ask the question, we believe he would have given one of the following three answers:
1. “The counterfactual is that the unemployment rate would be much higher had we not executed our balance sheet with our first $2 trillion of large scale asset purchases.”
2. “Do more.”
3. “Like I said at Jackson Hole, central bankers alone can’t solve the world’s economic problems.”
There really isnt much to say. Ben doesnt not have a clue. He doesnt seem to understand the problem nor has anyone told him the risks he is taking. There is tipping point when our economy goes lights out and we will get there if we keep adding debt into a system with a off the scale debt problem. Greece may seem awful, but at least they are trying to do something. In the US we are going to blow up and it could be even worse.
i suspect if ben were in your seat he would argue the same points as you. the problem is, what else can the fed do? i do think they should, as you may hvae argued, target long term rates if they think that will help rather than target a quantity they are willing to buy to keep rates low. or, they could buy assets other than treasuries. i am sure he would agree that he cant incraese agregate demand but he cant come out and say that. hes got to convey confidence in the tools he has.
if you were in ben’s seat – with the gov’t he has to deal with, now and likley coming- what would you do/say? (i mean that in a very good natured way)
I have a problem with all of the criticism of helicopter Ben. The Chairman may be not realize he is impotent to do anything, but I suspect he does. The problem is not necessarily whether Mr. Bernanke realizes the reality of the situation, but rather why no one else with the capacity to change things seems to understand the situation. I mean that economist in the White House, Congress,Wall Street, World Bank, OECD,and the IMF, all seem to be dead set against any real fiscal stimulus which would bring us out of this situation. In fact, all those organizations seem predisposed to fiscal austerity which will only make matters worse. It seems to me that Annaly Capital Management, and every other responsible group, should be questioning all these other orthodox economist as to why they refuse to face the real solutions and instead put all their blind faith in monetary policy. After all Ben is just facing what everyone else seems to be dumping on him. I don’t mean to defend Mr. Bernanke, I’m just saying it seems he dose not stand alone.
Ben has a clue. He just has no guts or integrity, just like ObaMao, Pelosi, Reid, and any Republican or Socialist (Democrat) politician you care to name.
The patient has a serious disease. The “Doctors” are not willing to administer the cure – deflation and depression – as it would threaten their power. Instead, they administer their “hair of the dog that bit ya” remedy: more debt, more asset bubbles, more gov’t interference, more dependancy, more printing, more lies and obfuscation
The “Doctors” are not willing to administer the cure – deflation and depression – as it would threaten their power. Pod
There is another way out besides one evil, the bust, being used to rectify another evil, the boom. It is called debt forgiveness. See Deuteronomy 15 and Leviticus 25. But since savers are cheated too by the fractional reserve banking system then a general bailout of the population is more in order.
Instead, they administer their “hair of the dog that bit ya” remedy: more debt, more asset bubbles, more gov’t interference, more dependancy, more printing, more lies and obfuscation Pod
No new debt is required. Instead the US Treasury, exercising its sovereign right to issue money could create and distribute some new debt-free fiat, United States Notes. Those who hate government will object but they fail to realize that the government caused this problem via its backing of the banking cartel and thus has a moral responsibility to fix it.
And don’t speak of “dependency” so lightly. How many have gotten rich via leverage via the government backed counterfeiting cartel?
Debt forgiveness? Great idea. Destroy free market capitalism with the stroke of a pen through the greatest reinforcement of moral hazard in human history. Destroy all animal spirits and wreck the culture. Great, other ideas?
Destroy free market capitalism with the stroke of a pen through the greatest reinforcement of moral hazard in human history. Pod
And what part of “government backed banking cartel in a government enforced monopoly money supply” sounds like the free market?
Great, other ideas? Pod
Yeah, a few that would implement genuine capitalism rather than our current fascist model. And others, who are not so liberty loving, have ideas too.
nobody is forced to spend on any consumption, at least not before ObaMao Care, nobody is forced to invest their capital, at least not before Banana Ben’s negative real rates, nobody is forced to borrow money, and nobody is forced to make a loan, at least not before the Socialist’s “community reinvestment act”.
Free market, pre Obozo? More or less, yes.
Free market, pre Obozo? More or less, yes. Pod
Then I guess the “free market” is unstable since it led to Obama. It is true that no one is forced to borrow unless being priced out of the housing market by negative real interest rates in housing is considered “force”.
Have it your way. If the US won’t do “capitalism” properly, including bailing out the current victims of it, then there are socialists, gold-bugs and worse in the wings.
Meanwhile, I get to watch the spectacle of people trying to do the right thing (getting money to the debtors) for the wrong or insufficient reasons. It would be best if we just owned up honestly to what has taken place, looting by a government backed counterfeiting cartel.
pod :
You got it right except about the Republican part. There is currently a large core group of conservatives that do want to face the problem. They voted against the bailout. They just do not get the fair haired treatment that the MSM gives to the socialist agenda.