Wednesday, July 13, 2011

Bernanke Admits He Is Clueless about His New "Tools" and How They Might Impact the Economy

I am not making this up. These are Bernanke's exact words in his opening remarks today before the Financial Services Committee (my emphasis):
Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally. Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs.
It really amazes me that Bernanke continues to play around with these new Fed "tools", when the former Fed tools of controlling the reserve requirement, the discount rate and open market operations worked for all past Fed chairman, including Paul Volcker and Alan Greenspan, just fine. Not that I am in favor of any money supply manipulation, but Bernanke is introducing an entire new set of tools for no legitimate reason and that as he, himself, puts it:
[The Fed's] experience with these policies remains relatively limited, and employing them would entail potential risks and costs.
To be monkeying around with this stuff during an incredibly volatile economic period is sheer madness. Bernanke is literally using the United States economy as his private experimental laboratory. I have said it before, and now say it again, Bernanke is a mad scientist, playing with my income and yours and the stability of the economy.

(Thanks2TaylorConant)

5 comments:

  1. "One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels"

    An explicit inflation target? Lots of countries already use this. And it would mean less QE would be done if inflation expectations are anchored. Nothing new here.

    "Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. "

    More open market operations, but long term instead of short term treasuries. Nothing radical there.

    "The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally. "

    Reduce it to zero it'll be back to normal? What madness!

    ReplyDelete
  2. People like Bernanke are "Mad Men"

    ReplyDelete
  3. "Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs."

    Yet, they'll keep on doing it anyway.

    ReplyDelete
  4. I wonder what happens if the Bernank tries to lower the IOER and somehow, something goes wrong. How fast can one multiply 1.5+ trillion dollars into an economy?

    ReplyDelete
  5. HPX, that's the 65 Trillion dollar question, isn't it?

    ReplyDelete