Friday, September 14, 2012

Bernanke is just being Bernanke - Or - Sorry, no conspiracy here

In event #4 of my "week to come" column I mentioned open-ended QE3. That would be a new round of money-printing and asset-purchasing with no specific dollar-limit or end-date. The objective would be to get those crazy-high mortgage rates down and pump more cash into the liquidity-starved banking sector. I mean if 3.5% mortgage rates isn't enough to get folks into the housing market, surely 2.5% will, right? And if a few trillion in excess reserves earning .25% on deposit at the Fed doesn't inspire banks to lend, surely adding an additional trillion or so will do the trick, don't you think? I mean you'd be chomping at the bit to lend a few hundred thousand to an everyday bloke for 30 years at 2.5%, wouldn't you?

Well, as you know, open-ended QE3 is indeed what they're now up to. But, as I imply above, something on the surface simply doesn't compute. Clearly, lack of monetary easing is not the problem. My best guess is that the Fed is counting on what they call the wealth effect. If they can somehow boost asset prices, perhaps holders of assets (wealthier on paper) will feel more confident and step out and make a few purchases. My fear is, in the long-run, higher prices are indeed what they'll get. But not to the limited extent they had bargained for. You see the price of a given commodity can rise out of sheer demand, or out of sheer lack thereof for the dollar. And, at the moment, they'll take it any way they can get it. However, by essentially busting the pipe leading to the spigot, the Fed is inviting serious down-the-road inflation in a very big way.

As for the popular conspiracy theory - that Bernanke is diabolically self-centered and out to seal victory for President Obama, and assure his own reappointment in 2014 - consider the fact that he doesn't act alone, and that he was appointed by a Republican. A Republican who wanted a fed chairman who he knew would be easy on monetary policy*. If Bernanke is anything, he's a consistent Keynesian (although he has warned, sternly, that the burgeoning national debt poses a huge economic threat if Washington doesn't change course in a hurry. Conversely, manipulating treasury rates ever-lower only incentivizes more of the same).

Anyone who has followed his track record, and his rhetoric, should not be surprised by his yea vote on QE. And, by the way, the Fed's own models don't show new easing measures affecting the stats for at least six to nine months out. I.e., if he (and the majority of voting FOMC members) were truly out to help the President, we'd have seen QE3 much earlier in the year. So those of you who think the election was just decided by a 200 point Dow rally, I think you're being a bit presumptive. I don't suspect the employment picture, or the economy in general gets measurably better before November 6. I.e., if Obama does pull it off, it won't be because of Bernanke. It will be because his brand of rhetoric speaks to today's majority (he has quite the knack for promising all the right things to all the right groups), and because Romney fails to make his case.

*Here's then member of the Federal Reserve's Board of Governors Ben Bernanke in a 2002 speech on deflation.

"The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost."

"people know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."

Note: These comments were made 4 years before his appointment to the Chair by GW Bush. If Republican policymakers want to scream foul (and I think they should), they should be screaming at one another. Bernanke is just being Bernanke...


  1. Marty, is there a precedent for such low-level employment and money-lending during a time of extraordinarily high liquidity and rock-bottom interest/inflation? What is going on? Could QE3 be successful just because of its mass psychological effects?

  2. Hi Rich,

    Is there a precedent? That would have to be a no. From what I understand (not having looked at the data myself) this has been the weakest recovery on record - and we have seen all-time record low interest rates and record high liquidity. What's going on? I think there's something to the "crisis in confidence" theory. That is, an unwillingness to expand given the uncertainty over, for example, the U.S. "fiscal cliff" (income and investment tax rates scheduled to rise, mandated budget cuts, and the expiration of unemployment insurance extensions and the payroll tax holiday - all come January 1) - and of course the European debt crisis...

    QE3 might, at some point, appear to succeed (of course, if the economy does pick up, there'll be the irresolvable was-it-QE or something-else argument). But my concern would be for the inevitable reversal in policy. The Fed will ultimately face the moment it has to unwind and begin tightening monetary policy (sopping up excess liquidity). You see it has a dual mandate; full employment and low inflation. What happens if, as a result of these record monetary infusions, the dollar retreats too much (i.e., high inflation), and we haven't reached "full employment"? That'll be one whale of a conundrum...