You know the populist anti-Bernanke rhetoric is getting too hot when people (however empty headed they may be) start using the word treason.
This is stupid. It smells to me like the thoughtlessness of an angry mob and I have a problem with the angry mob whether it started it's rampage in the union hall, or the prayer meeting. I'd love to be in a position to say that "I'm only gonna say this once", but I know I'll probably have to say it more than that. So here it is:
BERNANKE AND THE FED ARE NOT THE PROBLEM HERE.
Right now things are bad. But for Bernanke's actions they would be worse... maybe much worse. If you think he's the problem, or if the things he's doing are permanent and can't be undone, then you need to read up a little because you're making a mistake.
Even someone like Ron Paul who talks about abolishing the Federal reserve would have to have a facility in place to adjust the money supply (just like Bernanke is doing) or the consequences would be grave. What's that? you haven't heard him talk about that? Really? How strange. It's very unusual for a politician to only talk about one side of a story isn't it? I'm sure he must have mentioned it and you didn't see the story? No? Hmmm. How strange.
The talking heads say that Bernanke's actions are 'stimulus' but that's the wrong way to think about it. While congress is arguing about our long term destination, and dithering back and forth about whether we should detour around the storm clouds to the left or right, Bernanke is taking such action as he can to prevent the plane from crashing. His actions are temporary and can be undone as soon as fiscal policy takes the boot off the neck of private industry.
Congress and the President have failed utterly to do their jobs. They have charted a fiscal course which is irreconcilable with reality. But if they were to quit punishing productivity and rewarding sloth, they would create the conditions for producing real economic growth. If they did that, Bernanke's actions could be (and I believe would be) undone in an instant.
And the really horrible thing is that if and when this happens, all you principled visionaries will be getting on his back raising rates to quickly and stifling growth.
Seriously...grow up people. You're acting like liberals for god's sake.
6 comments:
Well, gotta disagree with you here. While I obviously agree on the fed gov't interventions, the Fed is absolutely part of the problem, and has been increasingly so as it has gotten more and more active over the past couple of decades. The "Greenspan put" was moral hazard writ large, and he provided the fuel for the global credit bubble by taking rates down to 1% in the wake of the tech bust...which was also, of course, fueled by easy $. Bernanke has doubled down on this, which is the main reason gold is soaring and volatility has become so extreme.
I'm a bit surprised you would back the Fed up given that what they do is not only price fixing, but for the most important price in the entire economy (ie the price of money).
Are you arguing that things are so far gone that Bernanke has no other choice? Even then wouldn't you agree that his actions, by undermining the stability of the currency in which people earn, save, and invest, are making the eventual denouement that much worse?
Rick, that’s a lot of balls to toss up, but you tossed them thoughtfully so I’ll try to address them as best I can. If I misread your points, please be patient with me.
You seem to take the biggest exception to the ‘moral hazard’ of having a mere man be the driver of monetary policy, and you site the ‘Greenspan put’ as an example. But so long as the Fed is truly ‘independent’, I’m dubious that such a moral hazard really exists.
There is no doubt that a man can be wrong – that’s a given. But the question concerning the evidence of a ‘moral hazard’ is, “Why is he wrong?” Is it a systemic error generated by a perverse incentive of the political system or is it something else? If it’s just his vanity, even that I’ll grant you may be systemic. But I think the actual evidence is minimal.
Money was too loose – I don’t dispute it. But I don’t know that it was too loose because of any political pressure brought to bear on Greenspan. The performance of Fed chairmen is usually assessed based on their success at maintaining price stability, so I’m dubious about the moral hazard of low rates. There is pressure sure; and people respond to that without thinking sometimes. But Volker is revered because he stood up to it, so where was his moral hazard? My point is, there is precedent for the contrary view.
Empirically, money was too loose. That was bound to cause problems. But the NGO’s and housing regulation had far more to do with that than loose money I think. You can say that if not that then something else – but then we wander into the extremely hypothetical. Fro the record I’m dubious of Fed independence, but if not the Fed, then what else? I’m not saying that we shouldn’t get rid of the Fed one day, but if we aren’t looking at the costs and benefits of the various other plans, then we really are being as bad as liberals – and in exactly the same way.
So let’s talk about other plans. How about the gold standard? It won’t prevent inflation, and it will cause further instability in unemployment. You’ll have stable money, but prices will rise and fall as the business cycle is amplified and demand rises and falls. That may look better on paper, but tell that to the guy with kids to feed. It will also raise some capital formation issues – especially if you don’t deregulate the rest of the financial markets. Implement it today and unemployment would rise not fall.
Does that eliminate it? No… not really, not in my mind. But we should be aware of what it will cost us, that’s all.
How about formulaic policy like the GDP based formula that Dr, Friedman sometimes advocated? He said the same thing – it would lead to periods of much higher unemployment and instability in demand. Plus, it would simply politicize the calculation of GDP or whatever other number you use to set monetary policy. It’s congress that regulates that as I recall.
At least if the Fed has a policy board, they can mitigate some of that.
If you want to get rid of the Fed, fine. I’m open to discuss it. But I haven’t heard anything from …really anyone… that wouldn’t result in a similar set of problems – some worse some less worse. That doesn’t end the discussion, but I think there are better times to make such a change than when the entire global economy is teetering on the brink of collapse.
As for arguing that I think things are so far gone….. yes, I’d say that’s a fair characterization of my view.
I think but for Bernanke’s actions, the economy of the western world would have already collapsed. The only argument I think might counter that is that if he let things falter a little more and become more desperate, it might be easier to get political action on the fiscal side. But that’s an awfully cynical attitude to take when its people’s actual lives at stake. And the Democrat world view is already (literally) in flames everywhere from Greece to Britain. Clearly there isn’t much to do before the election except keep things afloat a little longer and hope for the best.
Tom-
I remember seeing an interview with Volcker about 10 years ago (when Greenspan was still chairman) where he was criticizing Greenspan, and the interviewer asked what he would do differently in his place. And Volcker looked at her and said "I wouldn't have let it get to this point."
So I agree that we have nothing but bad options here - vastly oversimplified, we have pulled an enormous amount of demand forward through borrowing we can never hope to repay, and so the argument is that devaluing the currency is the "least bad" way out. The problem, as you have mentioned in prior posts, is that it's a thin line b/w this and hyperinflation, particularly in our fiat currency world where all currencies are "faith-based."
Re: the Fed's independence, it's not so much that I think politicians are meddling, but more that the Fed has made it clear its responses are asymmetric--bubbles are fine, but market declines are not. So as a result we have these manic markets, and days like today, when stocks are up b/c everyone expects Bernanke to preview QE3 at Jackson Hole.
As for what could replace the Fed, why do we need some kind of top-down controlled system for interest rates? Why can't the mkt set short rates just like it does long rates? I'm also not clear on your arguments against the gold standard--while you're right that you will still have business cycles and prices within the economy will move up and down, so long as the gold supply remains relatively constant it would do away with the systematic inflation we've all gotten so used to. In fact, in a stable $ system prices should actually fall over time as technology improves productivity.
All that said, I do agree things are incredibly precarious right now--the problem I have with the Fed's actions is they strike me as analogous to giving a recovering heroin addict a full syringe--sure, it may make him feel better for a while, but it will make the ultimate crash that much worse.
Rick
I don’t want to oversimplify it, but the fact that Bernanke is increasing liquidity does not necessarily mean he’s “devaluing the currency”. It’s falling today, but it might well be rising tomorrow. If we get real fiscal reform that leads to economic growth, he can very well pull back enough liquidity to flatten it out over the long term. There is a legitimate concern about allowing an individual to make these calls, but like I said – I don’t see any other options that don’t have other costs that are similar in scope.
I’d bet against QE3 at Jackson Hole. I think those that expect it are in for a potentially big disappointment.
I don’t actually see the gold supply remaining stable in that scenario. That’s a very small market and nations will manipulate the gold supply to serve their interests. Imagine what fun the Russians will have with it. Developed countries will almost certainly stop allowing individual trading it. I can just imagine the nefarious accusations that hedge funds will have to endure when manipulation of a gold price could cause increased price inflation or deflation.
Don’t think of the Fed as giving the junkie heroine, because I don’t think they are. It’s actually more like valium. It is absolutely not what our economy needs (or what our politicians think they want), but it might keep us from harming ourselves by bouncing off the walls while we Detox.
My big issue really is that if we want to get rid of the Fed – fine. Then lets talk about alternatives. But all the alternatives I’ve heard have problems and costs that are at least as high as having the Fed run monetary policy. And unlike liberals, we consider those costs before deciding what to do, not after.
But until we make that decision, given his charter, I think Bernanke has done alright.
Just an opinion of course.
TRAITORS DEFEND TRAITORS. I CAN SMELL A RAT!!!
Isn't it funny how difficult it's become to absolutely identify sarcasm?
In this specific case I think I'd prefer to give the benefit of the doubt.
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