Ben Bernanke appeared on 60 Minutes this evening and gave what I believe is an excellent interview.  He explains in great detail why he is still very concerned about deflation and the weak economy.  Perhaps most importantly, however, he explains why QE2 is in no way inflationary:

“Well, this fear of inflation is way overstated.  One myth that’s out there is we’re printing money.  We’re not printing money.  The amount of currency in circulation is not changing.  The money supply is not changing in any significant way.  What we’re doing is lowering interest rates by buying treasury securities.  And by lowering interest rates we hope to stimulate the economy to grow faster.”

Of course, this all sounds very familiar to regular readers.  We’re clearly in the minority in believing (in fact knowing) that QE2 is not inflationary, but where I disagree with Mr. Bernanke is that he can actually control the long-end of the curve.  In fact, I believe the rising interest rates of the last few months are clear proof that QE is the non-event I have always maintained that it is and that it will not help the economy is any substantive way.

He goes on to explain why the government can always control short-term interest rates and why the economic recovery remains far from self sustaining.  He also says the deficit should not be cut in the coming year.  The one problem point in the interview comes when he discusses how the banking system caused the great depression.   Although the credit markets were a clear contributor to the crisis and the Great Depression they were not the causes.  Both crises were human crises and not banking system crises.  Mr. Bernanke continues to misunderstand this.  The real fix needs to occur on Main Street and not on Wall Street.

He’s very humble and honest in admitting that he totally missed the financial crisis coming.  He admits that lending standards were too loose and comes close to admitting that the deregulation of the financial industry contributed to the crisis.  In addition, he says there is a growing divide between the rich and the middle class that is having a destructive effect on the country.  It’s baffling in many ways because he seems to grasp so many of the issues that are important here, however, his incessant focus on saving the banks is where his great flaw remains.  He appears to know that the financialization of this great country nearly destroyed it, yet he remains fixated on protecting these same companies that helped contribute so greatly to the crisis.  It should be obvious to him that there is a great flaw in his thinking…..

All in all it’s nice to see an open and honest perspective from the Fed Chairman.  I still don’t think Mr. Bernanke quite has policy action correct, but he’s certainly making strides in the right direction.  The full interview is attached:

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Mr. Bernanke’s comments are very reassuring, just like his July 2005 comments where he denied the possibility of a housing bubble. (“I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis.”)

    One of the biggest bubbles in US history, and Bernanke didn’t see it coming.

    But OK, if Mr. Bernanke is correct and QE2 isn’t inflationary, then why limit it to just $600B. Why not make it $3830B and fund all 2011 Federal spending by issuing Treasuries (which the Fed would promptly snap up)? Then we could declare a Federal tax holiday for everyone, which would really stimulate the economy.

  2. Is it possible that QE caused DOLLAR borrowed to do carry trade and cause the inflation in foreign country(for example Brazil, China, India,… ) and then caused US inflation by higher import cost ?

  3. The printing/not printing argument is moot. It is reflationary at the very least in stocks and commodities. But Shiller, Case, and Rosenberg argue there will be no impact on housing.

    Back to the printing, WSJ DealJournal blog argues via Jon Stewart’s “Imagineering Money” piece that Bernanke contradicts himself in teo 60 minute interviews on QE effectively printing money or not.


  4. You got to wonder. If QE2 was all about supporting the economy by lowering the medium (and possibly to longer) term interest rates, then Bernanke has failed miserably as bonds have collapsed since it was announced. To the more realist, Bernanke is a complete joke when he contradicts himself about QE1 was printing money (Well, effectively) but monetizing the debt and now he say QE2 isn’t even though it was exactly the same thing.

    Jon Stewart’s The Big Bank Theory nailed it just right.

  5. TPC,

    I have honest questions here that i would love if you could answer.
    Let us assume i am a “naive guy” n have no knowledge of finances. Here’s a list of very simple questions that i come up with that don’t get answers and contradict the statements made by BB.

    1) If NO new money is coming into the market with QE, why are commodities richer by 50-100% in 3 months. Why are equities up by nearly 20% in the same period.
    2) If NO new money is coming into the market with QE, who is investing in equities in the US and elsewhere??? Mutual funds have the lowest cash levels with highest redemptions in history. 2008 episode took down whatever hedge funds were left out. Institutions are facing redemptions from the likes of 401k’s n ira’s. So how come market keeps going up without any correction. Someone is definitely bidding up this market with some backing right???
    3) How come all of the media and even G20 leaders were touting $$$ demise and it
    ‘s adverse effects with QE if there was no new money being printed?
    4) How come Interest rates are rising for home loans, i thought QE was aimed to keeping them in check.

    I could actually go on. And all of the above, just being a simple commoner without advanced know-hows of how this system works.

    In any case, either you or anyone watching this q, if can answer these q i would really appreciate as i too have been pondering about these without any responses.