Thursday, December 3, 2009

Summary of Bernanke Speech (And a hint of possible seismic shifts)

Here's a summary of Bernanke's speech before the the Senate Committee on Banking, Housing, and Urban Affairs, which is holding hearings on his confirmation to a second term as Federal Reserve chairman:
I saved the entire financial world, but my work is not done, so you better confirm me for a second term.
The longer version of Bernanke's opening statement is here, of further note, he does also say in his speech:
Having acted promptly and forcefully to confront the financial crisis and its economic consequences, we are also keenly aware that, to ensure longer-term economic stability, we must be prepared to withdraw the extraordinary policy support in a smooth and timely way as markets and the economy recover.
I am really not sure how he intends to do this. It has to be noted that during the crisis period last year, he bought up (or loaned against) over a trillion dollars in mostly bogus paper. Even if we assume that the banks who are being lent funds are now strong enough so that they no longer need the Fed's money (and they just might not need it, that's what all those excess reserves could be about), is Bernanke just going to, overtime, withdraw the trillion plus in funds and retire the money? (I would think unlikely) Or will he just recycle the money back into the system? Will he recycle it back to the banks in some unique "new tool" way, or through regular open market operations? Or will he buy Treasury securities with the funds, direct from the Treasury, which will transfer the money to the government, in an attempt to ease the pressure that new Treasury debt issuance is sure to otherwise put on markets in 2010 ? Outside of recycling it directly back to the banks (which pretty much makes it a shell game, if they then add back it to excess reserves), other possibilities suggest seismic shifts to the economy. Money now at a commercial banks certainly has a different impact than money that gets rinsed, once, through the Treasury. Money that isn't put back as excess reserves by banks suggest even different kinds of shifts.

With the current fragile state of the economy, seismic money shifts can only be viewed as another reason to be extremely careful and conservative in what is a very, very unstable economic environment.

No comments:

Post a Comment