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:


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

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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  • prescient11

    Before all is done, I expect BB to buy some corporates, which is exactly what he should be doing and what the Fed used to do before WWII.

  • prescient11

    And TPC, I must say it’s refreshing to see your ability to take a more open view towards BB, rather than those who villify the guy and everything he says and does.

    It’s such a tough job, especially in this environment, I am pretty comfortable with him at the helm, to be honest. He’s going to do all that he can given his limited tool set and that’s all we can ask I think.

  • Tom Hickey

    1. It would seem that the Fed can control the yield curve if it targets price (announcing its preferred yield) rather than quantity (announcing the size of the buy). But the Fed must stand ready to purchase all the securities offered to meet its target, or at least convince the market that it is willing to do so.

    2. Given the revelation about the Fed’s provision of liquidity at the onset of the crisis, it is pretty clear that without it we would have entered Great Depression II. So he did need to save the banks and a lot of other firms, too. But when that immediate need passed, then a more sober stance instead of acting to recapitalize the bad actors and completely overlook their malfeasance. After all, the Fed is the chief regulator and strongly lobbied to retain that position.

    The Fed under BB may have acted courageously as lender of last resort to save the financial system in extremis but at the same time it hung Main Street out to dry by not extending liquidity to the real economy when the banks then failed to do so after being saved. The Fed thereby allowed the financial crisis to spread to the real economy, resulting in a huge output gap and driving unemployment to depression levels. The BB-led Fed definitely got the proportions wrong and completely failed as regulator.

  • TPC

    There has been a fairly distinct evolution in much of this thinking. It’s what I’ve been hoping for so it would be entirely unreasonable of me to continue pounding on the poor man when he is changing his opinions more and more towards what I believe. Specifically, as someone with deep monetarist background and a Friedman influence I think it’s remarkable that he is now essentially admitting that deregulation was a mistake and that fiscal policy should not be underestimated. He’s truly becoming open minded and that’s just fantastic to see.

    He’s still off the mark in my opinion, but it’s nice to see some change.

  • TPC


    1) I just don’t agree that the Fed can control the long end under the current structure. It’s not all that different from the ECB assuming they can keep periphery rates low by putting the EFSF gun on the table. The problem is, of course, that the Fed is not willing to intervene to the extent that is necessary. We both know they COULD control all rates if they desired. They could stop issuing 10 years at any second. But they won’t. So, the reality is vastly different from the dream world Mr. Bernanke exists in.

    2) As lender of last resort the Fed should have provided credit to firms that needed it. I think we can all agree there. But the extent of these bailouts was a gross misuse of govt power and market intervention. There were better alternatives to this crisis and I still maintain that a Swedish response or a controlled demolition of the banking system would have been more beneficial in the long-run. This excellent quote from Calculated Exuberance sums up my thinking nicely:

    “Building a financial system that never breaks down is impossible; yet building one that fails gracefully is in our power, if we embrace rule-based and punitive bank resolution techniques like bail-ins, instead of discretion-centered responses that demand public money and fuel moral hazard.”

  • Anonymous


    Bruce Krasting has a slightly different take on Blackhawk Ben’s 60 Minutes’ propaganda piece

    And Jim Rickards in a fantastic interview also doesn’t think too much of Blackhawk Ben saying he only got one out of three right in regards to Bagehot’s Doctrine or Rule of Central Banking which is:

    #1. Lend freely
    #2. Against good capital
    #3. At a punitive rate

    The Fed lent freely, but forgot the other two rules.

  • svg

    I think Bernanke is doing a better job than Greenspan did. Yes, he made some major mistakes. He didn’t see it coming. But to be fair, he has also gotten some things right since then. I still have a big problem w/ the Fed targeting asset prices – especially SPX. That just shouldn’t be allowed. And they should be more transparent. And they need to do much more re: regulation. I guess the problem is that when things are good, they really suck at taking away the punch bowl. When things are bad, they play pretty good defense.

  • TPC

    I agree with Mr. Krasting that it is rather foolish that Mr. Bernanke says he can control inflation 100%. But the whole premise of his argument is incorrect. The Fed is certainly not monetizing the debt. It’s an absurd notion to even say such a thing.

  • BK

    As an outsider 3000 miles away, I have always believed that BB knows EXACTLY what is going on but is simply hamstrung by the position he is in.

    He knows he now has pretty much no power, which is exactly what you have said many times before. He is not in charge of fiscal policy. In a balance sheet recession, monetary policy is useless. He definitely understands the monetary system as various quotes of his have shown before. His comments above on QE demonstrate this further. Overall, he is doing what he can given his tool set – which is very very limited.

    And regarding intrest rates, with some improvement in economic data, it is no surprise that bond yields have risen. Given the outstanding issuance, $600b of further bond purchases is like urinating in the ocean. Interest rates are lower than what they would be – not lower in nominal terms from when the program started.

    But what can never be forgotten is that he couldnt predict this crisis coming when given so much warning from the investment community….

  • Dr. Oliver Strebel


    1. Uncle Sam borrows 100 Billion Dollar from the money market and gives a treasury note. No money is printed.

    2. Fed buys the 100 billion treasury note via fiat currency. Here 100 billion dollar of money is printed ;), but the circulating money is not increased.

    3.Uncle Sam spends the 100 billion dollars. The circulating money is the increased by 100 billion Dollars.

    4. Uncle Sam can safely restart at 1, since the amount of circulating treasury notes is kept small by the Fed.

    This is not a Ponzi system, it is the Treasury/Fed system and a money printing scheme.

    Just my 2 ct ;).

  • Anonymous

    Well according to Dallas Fed Chief Richard Fisher the Fed is monetizing debt:

  • TPC

    QE2 has absolutely zero to do with the deficit and the US govts ability to spend money. That is simply not how the monetary system works. This absolutely, positively is not money printing and anyone who says otherwise knows not what they’re talking about.

  • TPC

    Agree BK.

  • Anonymous

    And KD thinks Blackhawk Ben is a liar and a poor poker player

  • TPC

    Yeah, Fisher is also worried that QE will spark horrid inflation. It would be humorous if men like this weren’t impacting millions of lives….

  • TPC

    Another person saying that BB is monetizing the debt. None of these people understand how our monetary system works.

  • FDO15

    BK says the Fed can use the reduced rates to buy more debt. That’s misguided on many levels, but most importantly, someone should inform him that rates are on the rise since QE started.

  • Jo

    What, and you do?? And we just sit for that???

  • TPC

    Well, the fact that the Fed Chief has agreed with all of my points on QE in interviews AFTER I wrote my research should be evidence enough that I am grasping something that others are not, but if you’d like to show me in detail how this is monetization I’m more than willing to listen and entertain any debate you are interested in starting.

    Several weeks ago it was popular to call QE money printing, but now that that has fallen flat on its face the term debt monetization has replaced it. It sounds just as scary. Unfortunately, it’s just as wrong.

  • NR

    If the spending of the administration is not covered by the tax revenues, the administration will have to issue new bonds to fund the budget deficit. The FED buys the bonds from the treasury which increases the national debts from say 90 to 100% of GDP. In an environment with a budget deficit the purchasing program of the FED is money printing, lifting up the money supply in circulation.
    The case would be different if the fiscal budget of the administration was balanced, the spending equaled the revenues. Here the national debts plateaued. In that case the purchasing program of the FED would not affect the money supply at all because the buying of bonds would just be prolonging money that is already in circulation.

  • Dr. Oliver Strebel

    TPC wrote: “QE2 has absolutely zero to do with the deficit and the US govts ability to spend money.”

    Umm … so the Fed is not buying treasury securities representing government debt or the impact of these purchases on the price of treasuries is neglegtable. If the latter would be true, the Fed’s actions would have no impact on the long term interest rate. And in fact the Fed buys treasury securities representing government debt.

  • TPC

    Tsys fund nothing in the USA….please see attached. It’s a great myth that the USA requires bond sales to fund its spending….

  • TPC

    This is not correct. Bonds are issued only due to Congressional mandate and in order to help the Fed execute its interest rate targeting via reserve maintenance. The issuance of US govt bonds has nothing to do with how much money the USA can spend.

  • TPC

    As Warren Mosler eloquently says:

    “The Fed’s desire to maintain the target fed funds rate links government spending, which adds reserves to the banking system, and government taxation and borrowing, which drain reserves from the banking system. Under a fiat monetary system, The government spends money and then borrows what it does not tax, because deficit spending, not offset by borrowing, would cause the fed funds rate to fall.

    The Federal Reserve does not have exclusive control of reserve balances. Reserve balances can be affected by the Treasury itself. For example, if the Treasury sells $100 of securities, thereby increasing the balance of it’s checking account at the Fed by $100, reserves decline just as if the Fed had sold the securities. When either government entity sells government securities reserve balances decline. When either buys government securities (in this case the Treasury would be retiring debt) reserves in the banking system increase. The monetary constraints of a fed funds target dictate that the government cannot spend money without borrowing (or taxing), nor can the government borrow (or tax) without spending. The financial imperative is to keep the reserve market in balance, not to acquire money to spend.”

  • remcoxyii

    To add: The bond market is not necessary for interest rate control. Another way to control the fed funds rate is to pay interest on excess reserves and lend at the discount rate. That way, the fed funds rate will always fluctuate in the range of these two. No bond market needed.

  • Dr. Oliver Strebel

    Agreed, the USA doesn’t need bond sales to fund money.

    And if you want to call this vertical or exogeneous money creation is IMHO just a choice of a scientific notation. Moreover you are correct that no money is printed. In fact just a few bits are created in the accounting systems of the Fed.

    However I forgot to mention a possible step 5 in my description of the Treasury/Fed scheme: If the Fed transfers the treasuries back to the account of the US-Treasury department thereby annihilating the debt of the treasury then the USA as a entity and every private party worldwide has lost no money at all.

    Nevertheless old-fashioned poeple like me are calling this to paper over a crisis with easy money. And the amount of circulating money might be increased by exogeneous money creation as I have shown in my first post. Moreover the money velocity might inrease, which is thought to create inflation by some money theories.

  • Adam Ruchka

    He was more personable and almost vulnerable than I have seen him before. I suppose 60 Minutes does well in portraying powerful people’s humanistic sides. His quivering lip at times made me feel as if he really felt the pressure of the billions (if not trillions) of dollars that swirl around each of his well calculated words.

    I was a believer that that Fed wanted inflation to be a concern, because it distracts people from the real, more dire concern which is deflation. TPC is absolutely right that BB is vocalizing opinions that much more closely relate to that of his own, however, I believe that BB may have always harbored such views about the effects of QE on the money supply. If everyone is screaming inflation, when it is really deflation to fear, you create a self fulfilling prophecy – or engineer a bit of inflation.

    At this point, I wonder; what good does it serve BB and the Federal Reserve to silence the inflationists?

  • Eric

    So are you reinitiating shorts on the S&P up at this level and still long the dollar.

  • scone

    I’m not sure what Ben could do to help Main Street, even now. Lowering interest rates doesn’t help much, when most people are up to their ears in debt and there is insufficient demand. Individuals might be able to refinance their homes, but only where they aren’t underwater and there is still lending going on. Leaving the hardest hit regions of Florida, Nevada, Arizona, out of luck. So Ben is essentially stimulating the regions of America that need help the least, and the stimulation isn’t having a huge effect anyway.

    Even if Ben could magically evaporate the underwater mortgages, that still wouldn’t create the demand for construction-related activities we saw during the “boom.” It’s not just the millions of excess homes that’s the problem, it’s all the people who trained and worked as carpenters, electricians, carpet layers, clerks in mortgage companies, and so on. Tying a huge chunk of the workforce to the FIRE industries creates an ongoing employment crisis that can’t be solved by the Fed.

  • But What Do I Know?

    BB’s explanation of the weather sounds great, but has he looked out of the window lately? Ever since QE II was announced, bond yields have gone higher–even in the parts of the curve where the Fed buying is heaviest. Why is that? Because his QE purchases are doing nothing more (and perhaps a little less) than soaking up new supply from the US government’s $1.4 trillion annual deficit. Red Queen’s Race, anyone?

  • Juan

    “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.”

    Ok, I give up. What is Ben using to “Buy” treasury securities? What is he offering that is “of value” in order to “Buy” these Treasury notes?

    If I buy a Treasury note I give the Treasury a check from my checking account. That represents “work” that I’ve done over many years. I do a service or make a product and sell on the open market. All of the Time, tools and supplies that I needed to produce my service or product have been used up. What’s been used up is real. It’s gone. It’s mind blowing when you contemplate the intricate web of time, tools, equipment, fuel, mining, drilling, manufacturing, education and people needed to run our economy.
    We use money to facilitate transactions in all these products and services. But it REPRESENTS the tangible things. Otherwise it’s just paper.

    If I save the excess over and above what I need to live on that represents My Capital that I’ve accumulated. I use that capital to buy a treasury note. The Treasury “promises” to pay me all of that “Work” back with interest in a certain time period.

    So what’s Ben using to buy treasuries?

  • Oroboros

    St. Louis Fed President James Bullard
    National Economists Club
    Dec 02, 2010

    “While asset purchases are sometimes viewed as unconventional,” Bullard said, “the financial market effects have been entirely conventional: real interest rates declined, inflation expectations rose, the dollar depreciated, and equity prices rose.

    Bullard said that asset purchases of Treasury securities at longer maturities can substitute for ordinary monetary policy by putting downward pressure on nominal interest rates further out the yield curve and upward pressure on expected inflation, thus, putting downward pressure on real interest rates.


    An easing of monetary policy produces its maximum impact on real economic variables, including output, consumption, and investment, six to 12 months after implementation. As with interest-rate targeting policy, disentangling the real effects of quantitative easing from other influences will be difficult, as economic performance will be influenced by other developments during this period. “Most likely,” Bullard said, “the real effects will be just as conventional as the financial market effects.”

    Bullard also addressed some of the risks and criticisms raised about QE2:

    * On criticisms that the program may not be effective, Bullard said that the financial market effects of the program have been about what one would expect from an easing of monetary policy.
    * On concerns that QE2 depreciates the dollar, Bullard noted that dollar depreciation is a normal by-product of an easier monetary policy, provided all else is held constant in the rest of the world, and that the U.S. has long maintained an independent monetary policy, a flexible exchange rate, and open capital markets. He stated that other countries need to have systems in place that can adjust to modest changes in U.S. monetary policy.
    * Regarding the rise in nominal interest rates, Bullard said that QE2 puts downward pressure on nominal rates through securities purchases but that the effects of successful policy would put upward pressure on nominal rates. Therefore, Bullard argued, looking at the level of nominal rates alone is insufficient to judge the success of QE2.
    * On inflationary concerns, Bullard said that while too much inflation is a legitimate concern, the 2010 disinflationary trend is worrisome right now. He emphasized that keeping inflation near the implicit inflation target is very important for maintaining the FOMC’s credibility.
    * Regarding arguments for using a commodity money standard, Bullard stated that although this approach was widely discussed in previous decades when inflation was high and variable, the volatility of commodity prices in recent years has made this approach problematic. He argued that inflation targeting can be seen as the intellectual descendant of commodity money standards. “Inflation targeting forces accountability for inflation outcomes onto the central bank,” he said.
    * On fears that the Fed is monetizing the debt, Bullard said the FOMC has often stated its intention to return the Fed balance sheet to pre-crisis levels over time. Once the FOMC returns the Fed balance sheet to its normal size, Bullard noted, the Treasury will be left with just as much debt held by the public as before the Fed took any of these actions.
    * On claims that QE mitigates fiscal problems, Bullard argued that QE has no impact on the longer-run U.S. fiscal outlook and that this outlook remains very poor no matter what the Fed does.

    [... and yet again, like Bernanke ...]

    Bullard also highlighted the imperative need for the Congress and the President to attack the long-run budget problems the nation faces. He said that Europe has given the U.S. an important wake-up call on how devastating it can be to leave long-run structural deficit problems unaddressed.

    [... making Bullard the third Fed president to call on Congress to "address the deficit" and help "take the baton" from the Fed.]

  • Oroboros

    [repeat post]

    From Ben himself on why the GD happened, from his first 60 Minutes interview: (0:15 to 0:44)

    1) The Fed let the money supply contract
    2) The Fed let the banks fail

    No need to guess what he thinks, he says it on camera. It’s the running loop he’s been telling himself all this time. His actions make “perfect sense” when you understand this loop in his head.

  • TPC

    Did you see his lip quivering the entire interview. He was as nervous as could be….

  • TPC

    They’re not getting the money from anywhere. But they’re also not adding to the money supply. This might help:

    “The nonbank public – nonfnancial
    corporations, state and local governments and
    households – cannot use deposits at the Federal
    Reserve Bank to effectuate transactions. Moreover,
    currency is not suffciently broad to be considered a
    temporary abode of purchasing power. For Friedman,
    high-powered money can be properly regarded as
    assets of some individuals and liabilities of none.
    So, let us be clear on this subject. In 2008, when the
    fed purchased all manner of securities, to the tune of
    about $1.2 trillion, the fed was not “printing money”.
    Bank deposits at the fed exploded to the upside, the
    monetary base rose from $800 billion to $2.1 trillion,
    yet no money was “printed”. Deposits did not rise,
    loans were not made, income was not lifted, and
    output did not surge. The fed could further “quantative
    ease” and purchase another $1 trillion in securities
    and lift the monetary base by a similar amount yet
    money would still not be “printed”. It is obvious the
    fed authorities would like to see money, income, and
    output rise, but they cannot control private sector borrowing. If banks were forced to recognize bad
    loans and get the depreciated assets into stronger
    more liquid hands, it could be debated on how much
    reserves should be in the banking system. Until that
    cleansing process is completed it will be a slow grind
    to cure the one factor which makes the fed “impotent”
    and unable to “print money”….overindebtedness.”

  • American Dreams

    Maybe I’m to daft to understand the intricate workings of the Treasury and the Fed but if said Treasury issues new bonds and sells those new bonds to any one of many primary dealers then said primary dealer sells that bond to the Fed within two weeks of its initial creation how is this not debt monetization?

  • TPC

    His book on the GD also comes to the same conclusion. He thought if he fixed the banks he’d fix everything. But he missed the real crux of the problem – Main Street. Had he focused on fixing Main St from the start he’d have fixed both though it probably would have irritated some bank lobbyists and maybe even resulted in a few more bank failures. What a shame that would have been….

  • TPC

    Monetization implies that the Fed is purchasing tsys to help the Treasury funds its spending. But since tsys don’t fund the US govts spending we know that this is illogical.

  • David

    I loved that on NPR this morning, a woman reporting on this very thing ended her piece with the summary that Bernanke is trying to “lower interest rates, increase equity prices and stimulate lending.”

    So now you’ve got a chance that the people who listen to NPR and don’t understand what is going on believing that the government is directly intervening to increase the stock market.

  • American Dreams

    Alright TPC, point taken. To label the current actions of the Fed “monetization” is incorrect because the outcome is NOT new money being created. What happens is the bank reserves increase exponentially with every new commitment that the Fed makes to continue with its POMO and QE programs. This action keeps interest rates artificially low and keeps asset prices artificially high. Eventually these excess reserve balances need to come down, yes? And it would seem this would have a seriously adverse effect on the banks with large balances. Hmmm (scratches chin) walking on the edge of a razor he is.

  • Doug Terpstra

    Indeed, even with makeup, HDTV is revealing, but the evident nervousness as likely betrays deception. I’ve often wondered why politicians (BB is a politician despite protestations) develop crooked mouths. It may be a physiological effect of practiced deceit.

    The Fed is clearly a cartel serving it’s syndicate members—not the people. Their only concern for the working class is that of any successful factory farm —animal husbandry. When the herd no longer serves its productive needs it is thinned without compunction.

  • TPC

    I think most people already think QE is somehow good for stocks either through some sort of interest rate valuation channel (although rates are higher) or via the inflationary channels (even though it doesn’t cause inflation).

  • TPC

    Well, you have to ask yourself just how much QE reduces interest rates? The 30 year is up 60 bps from the Jackson Hole speech. This article is one of the first I’ve seen where the major media outlets are beginning to actually catch on to the limited impact of QE via the interest rate effect:

    As for the reserves, with the Fed now paying interest on reserves they can technically keep the large balances at the banks. Of course, more reserves doesn’t change much. It just changes the composition of the bank balance sheet. It doesn’t make the banks more likely to lend since banks don’t lend their reserves.

  • irish

    He did not explain why QE is “in no way inflationary”. QE is predicated on inflation being too low in the first place, at least for Bernanke’s liking. That was one of the core arguments in favor of engaging in QE. That inflation is below levels consistent with healthy economic growth. So, Bernanke does not believe that QE is “in no way inflationary”. Just the opposite in fact.

  • TPC

    Sure, he thinks he can create expectations of inflation by pressing on rates. There’s only one problem with this whole theory – rates are rising.

  • American Dreams

    Not saying that POMO/QE reduces interest rates but I am saying that it keeps them artificially low. I can only imagine where interest rates would be if the Fed was not currently an aggressive buyer of Treasury issuance.

    Agreed on your banking points, balance composition and not lending reserves but what I think we should all be interested in is how does the Fed extricate itself from an expense of paying interest on said reserves and what is the net effect on the banks once this process starts. Any thoughts??? because all I’m seeing is the ghost of Christmas past.

  • Oroboros

    He also would have been labeled a socialist.

    Interesting how those Swedish and Icelandic “socialists” (let capitalism take its course, but in a controlled manner) have been able to recover more quickly than we American “capitalists” (talk the capitalist talk, until we actually have to implement it ourselves).

  • Jacob

    “But since tsys don’t fund the US govts spending…”
    Why then does the US issue treasuries? Only to recicle the old debt ?
    And how does it finance the new deficits ?

  • TPC

    Are rates artificially low? I think the market and the bond investors are responding faster to Fed expectations than most expect. For instance, imagine a stock buyback that is announced. There are hundreds of studies that show buybacks do nothing. Why? Because a buyback doesn’t change the underlying fundamentals of the stock. QE is no different. Without a real underlying fundamental change there is no reason to expect rates to drop substantially.

    What we see is an environment with very low inflation, mass unemployment, low demand for credit and generally weak economic trends. Are low rates merited? I think so.

    I think IOR might be a permanent policy….

  • TPC

    It finances new spending by telling men and women to walk into a room and change numbers up and down in a computer.

    Treasury issues bonds due to Congressional mandate in addition to helping the Fed hit its interest rate target.

  • roger erickson

    Bernanke would side step a lot of confusion if he’d make it explicit that QE is buying existing T-bonds sideways from primary dealers, NOT purchasing new T-bonds from the Treasury.

    ps: T-bonds are basically a relic of the gold-std days; they could have been halted completely back in 1933; just another lingering habit, like your gramma’s ham recipe

    as Mosler & Bill Mitchell keep pointing out, CBs can dictate inter-bank interest rates any way they want; T-bonds are by no means necessary

    “ECCLES: We [the Federal Reserve] created it.
    PATMAN: Out of what? 
    ECCLES: Out of the right to issue credit money. 
    PATMAN: And there is nothing behind it, is there, except our government’s credit? 
    ECCLES: That is what our money system is.” 
      – Federal Reserve Board Governor Marriner Eccles in testimony before the House Committee on Banking and Currency in 1941, during questioning by Congressman Wright Patman about how the Fed got the money to purchase two billion dollars worth of government bonds in 1933.

    [ps: If we can direct our CB to arbitrarily create the currency to "buy" bonds, in order to quickly force innovation through outdated methodology, then it's also immediately obvious that we don't even need to "buy" the bonds, and may bypass them as well.   If Treasury-bonds were irrelevant & obsolete in 1941, then there is no reason for the USA to be limiting our ability to think creatively in 2010 !!] 

  • roger erickson

    “When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and [pretends to pay] interest for the use of its own money, it occurs to me that that is going too far. I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money… The Constitution of the United States does not give the banks the power to create money. The Constitution says that Congress shall have the power to create money, but now, under our system, we will sell bonds to commercial banks and obtain credit from those banks. I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with this Congress for sitting idly by and permitting such an idiotic system to continue.”
       John Wright Patman, US House (1929-1976), 
       Chairman, House Committee on Banking and Currency (1963-75)

  • George H

    A sinister view why long rates are higher.

    In the interview Bernanke repeated (1) banks are still in shitty shape (2) banks are too big to fail (3) banks = economy = employment, so (4) he won’t stop until banks are as profitable as before.

    So a less flattening yield curve allows the banks reap in low risk profit again, as in 2009 and early 2010. So Bernanke focuses on the short end. He is going to do this as long as the banks, um, the economy is in bad shape.

  • Jack Sparrow

    There is still something maddeningly circular about this argument.

    Let’s say as a hypothetical the government decided to issue a trillion dollars worth of new treasuries in one shot. Such heavy supply would undoubtedly cause bonds to plummet and rates to spike dramatically. Enter the Fed, who buys all the treasuries via QE XXL.

    Under this scenario, could one again say “not inflationary” to both the debt issuance and the QE asset swap? What if the amount issued and QE-ified was not just $1 trillion, but $10 trillion? A hundred trillion?

    At some point, size matters. At some point, inflationary pressures emerge from unproductive government spending decisions, regardless of whether that pressure technically originates in the Fed or the congress (via the issuance of nonproductive debt). Further note that even if Bernanke claims he is “not increasing the size of the money supply,” congress can do as much by creating new debt for the Fed to monetize.

    And if at some point size of debt issuance matters, then one has to consider arguments of scale and degree in respects to impact of that debt and how it is treated… it just can’t be that black and white to say government debt issuance and follow-on Fed operations have zero impact on inflation. The argument as presented is becoming self-referencing and tautological to an eybrow-raising degree.

  • SS

    Why does it matter how much they buy? The market attributes a rate to the 10 year bond, not the government. If they bought $10 trillion in bonds there would likely be some short-term panic and then the treasury would continue issuing bonds as they saw fit and the PD’s that buy those bonds would attribute a rate that they feel is appropriate and in accordance with the environment of the day. The only way the government could eliminate the 10 year bond and effectively take the rate to zero would be to stop issuing them. The quantity of these purchases does not matter. QE1 was twice as large as QE2 and it had no discernible impact on rates. The Japanese were at this for 5 straight years buying trillions in debt and it didn’t produce any new borrowing, no major uptick in inflation and rates drifted lower in accordance.

  • juan

    I agree. This is beginning to sound like “How many angels can dance on the head of a pin?” If debt issuance size doesn’t matter why not just cancel all debts and start over? It’s all just imaginary anyway… isn’t it? or are there real assets, capital, work, products, at risk?

    Why doesn’t Ireland just repudiate it’s debt like Iceland did, and Greenland before that? Greece, Portugal, Spain, Italy, and finally the U.S.A. could all follow suit one after the other over a period of three or four years.
    The people of Iceland took a bit of a bath because their currency was devalued by about 23%. However, the local prices dropped too, and the people of Iceland seem to be recovering.

    Seems to me the only people who would suffer in that scenerio would be the people who took the risks in the first place. They certainly would have taken the profits if the risk had paid off, so why shouldn’t they take the loss, since it hasn’t.

    All of this nonsense with BB shifting a bunch of paper markers around just seems crazy.

  • SS

    Ireland and Spain are in a different type of monetary system. It’s not comparable to the USA. TPC has explained this previously.

    The USA could stop issuing 10 year bonds altogether if they wanted to. It wouldn’t matter at all. In fact, they stopped issuing the 30 year earlier this decade and it didn’t matter at all. It had almost no impact on anything. The US government only needs to issue a CD to drain the reserves from the banking system. It could be one month or 12 months. It doesn’t matter. They’d keep rolling over the bonds and people would keep saying that it helps to finance something. It’s total bull shit.

  • TPC

    You could take that to an extreme and just ask the Tsy to stop issuing all bonds altogether. People would freak out for a few months, the you know what might even hit the fan and then people would realize that the world didn’t end. Credit markets would normalize and the Fed would execute the reserve drain with a short-term instrument. People would wonder how the govt is financing itself and we’d likely see some chaos for a few months. But nothing would fundamentally change in the way the US govt operates, spends or executes monetary ops. This is why we’re going to see a very gradual progression towards this system.

  • TPC

    Right, you cannot compare Spain with the USA. Apples and oranges.

  • Jack Sparrow

    Yes, in accordance with your suggestion the government could simply spend at will, the equivalent of direct seignorage or, less politely put, “clipping coins” as the Romans used to do and thus and extracting a hidden tax in the form of mild debasement.

    Except, even in a “no bonds” scenario, the same inflation slippery slope occurs!

    Again, imagine a world in which no debt is issued at all and the government is “self funding” as you say. There are STILL practical limits to what the government can spend, relative to the size of the economy, because too much non-productive spending would devalue the medium of exchange and also negatively impact the PSYCHOLOGY that supports that medium of exchange. Imagine the “self funding” government of Belgium or Nauru trying to spend a trillion dollars for a graphic example of this.

    Sovereign governments do not reside in a magical place where excess non-productive spending can be written off with zero effect. This can only be implied against the backdrop of a very large, systemically anchored government (i.e. that of the US). But limits, outer bounds, and potentially violent fat tails at those outer bounds still apply, which, in turn, means it is not necessarily irrational for investors to have incremental debasement expectations as those outer bonds are creeped up upon.

  • Jack Sparrow

    I think what may be going on here is a sort of “infinite capacity” fallacy. There seems to be an implied belief (or assumption) that the United States can comfortably issue an infinite amount of debt, which is of course impossible.

    Even if this “infinite” assertion is denied out of hand, it is strongly implied in the fundamental assumption that no inflation or debasement can ever issue forth from the debt issuance / QE swap loop. IT DEPENDS ON THE SIZE OF THE LOOP. As the loop gets bigger, there is a logical argument for the market showing a “debasement aversion” reaction.

  • TPC

    Jack, on this we agree. The govt cannot create currency in excess of productive capacity or prices will be bid up. Is that the reality of today though?

  • TPC

    Most certainly not. There is a very real limitation to how much currency the US govt can issue. I have never said otherwise.

  • Jack Sparrow

    But if there is a limitation to how much currency can be issued, then there is a limit to how much debt can be issued also, as debt wholly fungible into currency via the operations of the Fed.

    If one accepts this line of thought, then it stands to reason a certain amount of debt can be inflationary. (A = B = C: An excess issuance of currency can be inflationary, debt is fungible into currency and indeed swapped into currency at times of distress such as now.)

    And thus, if one accepts that debt can be inflationary (because currency can be inflationary), then it seems to make the entire QE argument a red herring because the market can simply be rationally responding to excess levels of debt!

    That is to say, the market could have a rationally concerned inflation-oriented response to Bernanke’s QE efforts because the very activity of aggressive and serial QE suggests there is too much damn debt on the books already (which is functionally the same as too much currency via the fungible liability mix)!

    It still seems there are wholly logical arguments as to Mr. Market can get a whiff of QE and smell inflation, even if the “swap” considerations are, on an extremely technical level, theoretically correct…

  • TPC

    You’re still thinking of the govt debt as if it is the same as household debt. It is not. You and I have a revenue constraint. That is the most important facet of debt. There is a very real solvency risk with you or I and any credit we are extended. The US govt has no such thing. They simply have a price/credibility issue. I fully agree that we should not issue currency in excess of our productive capacity. But the very low levels of capacity utilization in this economy say that we are not currently at risk of doing that. I know guys with Harvard MBA’s who are waiting tables. Is that person’s capacity being fully utilized or could someone higher him at a substantially higher wage to perform a function that is in-line with his talent level? Stupid example, but you get my point….

  • Adam

    The current economic mess can’t be fixed with monetary policy. What Ben could do, and this is where I think he proves he doesn’t get it 100% because he’s married to bad ideology or bad politics, would be to get the nation started on talking about Fiscal policy and how the deficit isn’t a concern while we are in this mess. But no, he more or less fiddles around with his policy tools and lets the banana republic politicians beat each other up over austerity proposals.

  • Jack Sparrow

    Right, but to suggest that the U.S. government has ZERO solvency risk takes us back to the “infinite capacity” assumption again… at some point even Uncle Sam loses the faith of his creditors. Leverage is leverage and funding costs are funding costs, whether you are a waiter or a trillionaire.

    This, again, is why I suspect some kind of infinite capacity assumption is near the heart of the matter… to operate on a “zero solvency risk” assumption for the USG is to effectively assume debt issuance capability is infinite. But that is approximately the same as assuming currency issuance capacity is infinite. Which it isn’t.

    We may get practical example of the solvency risk question, btw, when Japan surpasses the point of no return in its ability to self-maintain JGBs…

  • tradeking13

    There is also an extended portion of the interview that didn’t make it into the broadcast:

    60 Minutes Overtime – Interview with Federal Reserve Chairman Ben Bernanke

  • TPC in

    You’re missing the point. The USA has no creditors in a traditional lending sense. If we want to be really technical, the only people who are creditors of the USA are the taxpayers so the only form of insolvency in this country would be a collapse in the tax system or really a collapse in the economy. This is essentially what hyperinflation is. Is this realistic in the current environment? Does the hyperinflation theory still carry even one iota of credibility?

  • Jack Sparrow

    p.s. It also makes an important difference whether you are arguing QE is not inflationary “in this instance” or not inflationary “anywhere ever.” The first argument is situational; the second, much more theoretical and technical.

    And even with the first argument (situational, against a backdrop of underutilized capacity), one could still argue Mr. Market is making a (rational) bet that QE efforts will overlap a successful recovery and a revamping of monetary velocity, with the Fed (despite Bernanke’s assertions) not being able to withdraw excess stimulus in a safe and timely fashion.

    Really a quite fascinating debate… still seems to me, though, that flatly saying “QE is not inflationary” runs aground of clear realities…

  • TPC

    Well, let me ask you a question. Do you think traditional monetary ops is inflationary? For instance, was it inflationary when the Fed cut short-term rates from 5% to 0% in 2008?

  • Jack Sparrow

    Japan’s deficit is almost wholly internally funded (I believe something like 95% of JGBs are domestic owned), and yet the structural threat of hyperinflationary collapse in Japan is very real given the bind they have put themselves in. (At some point Japanese retirees turn from savers to spenders, the Japanese government is forced to borrow at higher rates elsewhere to handle debt service costs, exploding debt dynamics kick in, and that’s all she wrote.)

    At any rate, though, I am not arguing for a hyperinflationary outcome here so much as pointing out that, in a rational assessment of the system, one must consider that hyperinflation resides at the far end of the spectrum!

    The point is not that hyperinflation is a genuine risk. Instead, it is that, while hyperinflation is an extreme outcome that the U.S. will likely never get to, it is an outcome that is theoretically POSSIBLE and thus one that we can INCREMENTALLY move towards.

    There is a world of difference between “hyperinflation can never happen” and “hyperinflation is bloody unlikely, but at least theoretically possible.” In a world where hyperinflation is at least theoretically possible, even if damned unlikely, excess debt issuance can result in incremental upticks in debasement concerns, much as the value of a Credit Default Swap can slowly rise as a credit profile deteriorates at the margins.

  • JPMartin

    Indeed I am of the opinion that it is inflate or default… the whole process of delation is a transfer of wealth effect. Those who bought on margine quickly found their assets worth far less than originaly purchased for… since a majority of companies and families operate on margine – the credit crunch stifled much needed funds that never reached ma and pa on the street.

    Interestingly enough it is amazingly funny to look at the unemployment numbers still hovering around the magical 9.8% fake wall… a better insight into the true climate is to look at how many people actually have jobs… initial claims is hoovering around 54-56%… so you’re telling me that 34.2%-32.2% of the population has a job under the table…?

    Gimmie a break!

  • Jack Sparrow

    Whether traditional monetary ops is inflationary is a wholly situational question.

    If the Fed is cutting short term rates in the face of a massive and violent credit contraction, for example, then no, because the Fed’s actions in such an instance are the equivalent of throwing a mattress into a volcano.

    It seems logical to me that inflationary expectations cannot be assessed independently of at least three factors: 1) Credit Quality, 2) Prevailing Psychology, and 3) Monetary Velocity.

    Though Uncle Sam may never become a full-on deadbeat, his profile can decline at the margins. Psychology also has impact in respect to which “safe havens” investors move towards and what mix they choose. And last but not least, monetary velocity is a huge driver that the Federal Reserve does not really control. In times of contraction and panic, monetary velocity can fall through the floor as the system all but freezes in which case standard operations do little at all. In the opposite situation, times of rampant speculation and raging boom, Fed tightening operations can be like hitting a stubborn mule over the head with a 2×4.

    Point being, all this stuff is three-dimensionally connected and very hard to assess in a vacuum…

  • TPC

    I don’t deny that hyperinflation can occur in the USA. I simply think the probability of it occurring is extraordinarily low.

    The Japanese govt is not internally “funded”. That’s a curious myth. It just so happens that they have a high level of domestic bond ownership primarily because they are a trade surplus nation and therefore have lower levels of demand for govt bonds from foreigners. If you study the bond auction data in the USA you’ll notice that the primary dealers can ALWAYS take down 100% of the auction. They’re designed that way intentionally. If we wanted to give the same appearance that we are “internally funded” we could easily just sell all of the bonds to the PD’s and tell foreigners to take their pieces of paper and shove them you know where. Not dissimilar to what we do with China when they bid on one of our corporations. They have a desire to use their USD’s to buy US denominated assets instead of having them sit in checking accounts at the Fed….. Of course, then people would talk about how we are “internally funded” and come up with some other silly excuse for why our monetary system is on the verge of collapse…..It’s like the “money printing” thing of late. Once that argument was proven wrong and fell flat on its face people turned to “debt monetization”. It’s total sensationalist nonsense. I don’t ever deny that this country has huge problems, but come on….

  • RSDallas

    You made reference to Hoisinton earlier in the blog. The people over at Hoisington are brilliant! I somehow found them about 1.5 years ago and started reading their newsletter and they have been spot on. I’ve also stopped by your site for about the same amount of time. Nothing has changed since this debt blow up event began. Still, to date, only one large entity has failed and the remaining interties have been allowed to make up the value of whatever assets they currently have on their books. Why doesn’t the Fed acknowledge the fact that the bad debt has to be worked off and why does every bank and every country have to be back stopped?
    I am just shocked that the Federal Reserve has been allowed to rob the citizens of the US blind. Uncle Ben works for a private banking cartel and has one mandate, too insure the financial soundness of the “important” member banks. Even if it means looting the American people. Some would say, “Hey that’s not right just look and see the hundreds of banks that have failed”. The banks that have failed are the pawns TPC. The only winners in our Nation over the last 2 years have been the “important” banks, the insurers and the investment houses. Our money system demands that if you giveth, you must also taketh. Who is doing the giving and where is the money being taken from? Put another way, “why is the burden of loss being shifted from the institutions to the American Citizen?
    All I want to know is why can no “important” business or country be allowed to fail?

  • Adam


    Per my less than perfect analysis, I would say you suffer from far too much noe-liberal economic bias. Money Velocity, Rational Expectations, Reserves… Bad economics with little supporting real world data.

  • Adam

    Jack Sparrow,

    Because I know TPC doesn’t like comments without basis, here is some light reading on neo-liberal myths…

  • first

    Rates are rising because we are all dumping them to Ben.
    Soon the Fed will have a real nice portfolio.
    Unwinding it will be something else.

  • Craig Masin

    Mr. Beranke says “The amount of currency in circulation is not changing”. The data from the St. Louis Fed shows the money supply continuing to grow. Where is the money coming from?

  • Jack Sparrow

    And I’m not much a fan of cordial debates that devolve into a vaguely religious flavor with high-handed acolyte references to “comments without basis” and “neo-liberal myths”… what I am confused about is that my main points were more or less agreed with:

    The capacity to issue currency is not infinite (and thus neither is the capacity to issue debt, as the two are fungible in respect to the liability mix); furthermore, inflation (and inflationary expectation) has three key drivers, credit quality, prevailing psychology, and monetary velocity, all of which can be affected by incremental changes in total debt levels and the market’s assessment of the current state and direction of the economy on the whole.

    If you choose to question these terms, all of which are straightforward and empirical — even velocity is not that controversial a concept, referring as it does to simple credit flows — and label them myths while pointing to outside blog arguments that attack a straw man and do not address my main points, then I will feel so inclined to smile and walk away.

    I never said that QE MUST be inflationary, nor guaranteed for certain that it IS inflationary in this instance, nor in fact argued the technical aspects of the asset swap or liability mix, but rather I strived to show — correctly, I feel — how QE possibly COULD be deemed inflationary under certain circumstances, within a broader context including the three drivers mentioned above, thus invalidating the rather blanket statement that QE is “not inflationary” period. It is thus possible for investors to interpret Bernanke’s QE-related actions as inflationary and not be “wrong,” thus adding an overlay of nuance, subtlety and open-mindedness to this whole debate in such a way that seemed to be missing before.

    Good day and good luck to you sir.

  • first

    “I know guys with Harvard MBA’s who are waiting tables. Is that person’s capacity being fully utilized or could someone higher him at a substantially higher wage to perform a function that is in-line with his talent level? Stupid example, but you get my point….”

    TPC. There can be such a situation as you mention and still be inflation.
    It’s called stagflation.

  • Rob Jones

    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.

  • Anonymous

    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 ?

  • RSDallas

    Adam & TPC,

    I hope you are still monitoring this thread. I have to say that I am sick and tired of reading the views of these so called intelligent people. The government is “simply” not the answer here and it never will be. The “simple” answer lies in the “simple” concept that business entities and individuals take a risk every time they “invest” in anything. The investment is “simply” made with the “simple” vision of making a “simple” return. When a business makes an investment in let’s say equipment to enhance the profitability of its business, it does so with the understanding that “simple”, natural market guidelines will remain intact. In other words the “law of the jungle” rule is and always is employed. Our leaders and so called scholars have done nothing but almost guarantee our “important” financial institutions that the law of the jungle does not apply to them. Henceforth these so called “important” financial institutions have been rewarded for making the worst financial decisions in the history of business in the United States. Our leaders and scholars have violated the core law of “the law of the jungle”.
    A Government should have the ability to monitor and put in place a checks and balance system that’s intention is to protect the economy as a whole, not too protect “chosen important” businesses. We now have a market that is dysfunctional as a result of the grievous intervention our Fed, Treasury and leadership has imposed on our markets. Simply put, these businesses that made bad decisions should have been allowed to fail.
    Our economy will not begin to heal from these bad business decisions until the business entities face the reality of their decisions. Look no further than Japan if you have any doubt about this.

    The only policy that will prove to be the catalyst for our great Nation to pull out of this economic nose dive is heeding to the “simple law of the jungle”.

  • TPC


    I don’t disagree. I have never said that govt is the answer. But that doesn’t mean they can’t help nudge us in the right direction. Unfortunately, they’re doing a pretty bad job of that right now….

  • JBL73

    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.


  • Tim

    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.

  • Jaosn_70


    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.