Time magazine has announced Federal Reserve Chairman Ben Bernanke as its 2009 Person of the Year.
Bernanke will be featured on the cover of the magazine that hits stores Friday.
Time called Bernanke " the most powerful nerd on the planet." This is true. However, it is not clear he knows what he is doing with his power. As I recently pointed out, Bernanke appears to use the words "monetary policy" in two different ways. When he discusses the 1930's, he uses what happens to money supply as examples of monetary policy (Specifically tight monetary policy). When he discuses current day monetary policy, he switches from focusing on money supply and references interest rate policy.
Money supply and interest rates are two different things. Depending upon where the real interest rate is a lowering of the rate may not be enough to influence money supply, as is the case currently. Despite very low rates, there has been virtually no growth in money supply since March. This has serious policy implications and is likely pushing the economy to the second down leg of a double dip recession.
If Bernanke was consistent with his use of the words "monetary policy" and used it to mean influences on money supply, as he does when he refers to the 1930's, he would in no way consider the current period a period of "easy monetary policy", which is what he is doing.
Further, in his recent response to questions submitted to him by Senator Jim Bunning, he identifies "quantitative easing" as:
... when it [The Fed] purchases large quantities of securities, paying for them with newly created bank reserve deposits, to increase the supply of bank reserves well beyond the level necessary to drive very short-term interbank interest rates to zero.He makes no note of the fact that most of the added reserves have found there way on to the "excess reserve" section of the Federal Reserve balance sheet.
Thus, he thinks he is easing in two ways, by QE and by keeping the current interest rate low. Since, QE is ending up as excess reserves it is not impacting the economy. Since money supply is not growing at current interest rate levels, the real interest rate must be lower and thus there is no money growth from this "easing". The only indicator that suggests the true picture of a current "tight monetary policy" is the fact that money supply isn't growing, the definition of tight policy that Bernanke uses when he talks about the 1930's but not now.
Thus, while Bernanke is hailed as an expert on the 1930's and the jump is then made that he thus knows how to keep the current economy from an even worse downturn, in truth he knows how to drive a Model T Ford, but when he gets into a modern day automobile he is driving it like a horse and buggy driver.
Person of the Year, yes. But a very confused person, who could very well drive the economy off a cliff with his continued stop and go money supply antics.
(Bernanke photo by Rayne Woo for EPJ)
>>Thus, he thinks he is easing in two ways, by QE and by keeping the current interest rate low. Since, QE is ending up as excess reserves it is not impacting the economy. Since money supply is not growing at current interest rate levels, the real interest rate must be lower and thus there is no money growth from this "easing".<<
ReplyDeleteBob,
Would it therefore be accurate to say that, in spite of Bernanke's attempts to ease, banks are accumulating reserves and the monetary policy is in fact not easing? This is different from saying that Bernanke isn't printing money, isn't it? (Interest rates can't be reduced below zero) He's printing money but its not getting into the real economy, correct?
I consider Bernanke printing money when it gets into "the system". That's the only point it has impact on the economy.
ReplyDeleteI am also trying to make the point that Bernanke thinks he is "easing" by what he is doing and he therefore thinks no further steps need to be taken (which from an Austrian perspective, no further steps need to be taken) but from his perspective of trying to halt the capital structure adjustment he is way off.
As The Visible Hand. points out, the current effective Fed Funds rate is too high relative to 3 mos T-bills. http://tinyurl.com/ykwprx9
If Bernanke adjusted that you would see money supply grow. He's not doing it because he really thinks he is easing in a way that impacts the economy, which he is not.
Bob, thanks for the photo credit. I think Bernanke is just part of Obama's economic team to engineer an economic recovery by taking over failing industries (e.g. automakers, banks) and influencing their decisions by forcing automakers to change their product lines to support a future export driven economy and banks to lend to help homeowners refinance and others buy distressed properties if they qualify under tighter lending guidelines. The big question in my mind is if the "all in" move of QE and keeping the discount rate near zero percent will work. What bubble will pop next? Treasury bonds? Sovereign debts? Emerging markets?
ReplyDeletePerson of the year? This is the dumbest thing I've heard this week.
ReplyDelete