Bernanke turns obfuscatory
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When Ben Bernanke appeared on “60 Minutes” in March 2009, he was immediately embraced by middle America and overnight became considered the foremost explainer of economic concepts to the nation. This time around, Bernanke’s much more embattled. And his answers are much less clear, much more political, and much more contentious. This is not how impartial technocrats should speak:
One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way.
Yes, Ben, you are printing money. It’s how you pay for those Treasury bonds you’re buying. Greg Ip says so, and so does Scott Grannis, who helpfully provides this chart from the first round of QE:
Look at the y-axis, and you’ll see that $600 billion is a lot of money, even if it’s less than we saw in QE1. Clearly the monetary base is changing in a significant way.
Bernanke continued with this:
Pelley: Can you act quickly enough to prevent inflation from getting out of control?
Bernanke: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.
Pelley: You have what degree of confidence in your ability to control this?
Bernanke: One hundred percent.
Bernanke’s first response doesn’t actually answer Pelley’s question: Pelley didn’t ask how long it would take to raise interest rates, he asked how long it would take to get inflation under control. Obviously, it would take longer than 15 minutes. How much longer, Bernanke doesn’t say. (And, sadly, Pelley doesn’t push him.)
And Bernanke’s second response is a lie. Or if it isn’t, he should be fired immediately. No central bank governor can or should ever have 100% confidence in anything: only a psychopath who will never change his mind can say that. The Fed’s ability to control inflation is a dark and mysterious thing; it’s not some kind of iron-clad law of physics.
Bernanke knows that he has friends at “60 Minutes”, and indeed they let him run down his talking points, giving no pushback along the way. He wouldn’t get away with this kind of performance if he started giving Trichet-style press conferences. Which is one reason I suspect that’s not going to happen.
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Bernanke knows the difference between “monetary base” and “money supply”, an increase in the former doesn’t automatically lead to an increase in the latter, so he is right to say that he is not “printing money”, something that would be obvious if you overlaid your monetary base chart with a chart of a large money supply aggregate like M3 (which is going DOWN).
Also, there is a big difference between “we can act decisively” and “we will act decisively”. A large part of the current crisis can be traced back to the Fed’s failure to raise interest rates rapidly in the 2004-2005 period when we were recovering from the dotcom bust. That failure was a failure of will, not of skill. Unfortunately, all indicators point to a repeat this time around as well.
Excellent comments
What we heard about the “QE2″ is as good as Bush-Tax-Cut which will likely further bubble up US Debt in multi-trillions.
It is about greed and corruption.
Fed Reserve = most of politicians who are working for money, not Americans and America.
http://oi51.tinypic.com/4idag7.jpg
I audibly gasped when he said “100%”. But would the 60 Minutes audience understand anything more nuanced than that answer?
Alea – Bernanke can print (create new MB without sterilizing it) while shadow banks are destroying M3 faster that BB can create MB. While that may be relevant to whether what Bernanke is doing is appropriate, that doesn’t mean Bernanke isn’t making new money.
So in summary, the disagreement from Alea and PragCap is that current QE doesn’t count as “printing money”, because the banks don’t loan it out, but rather put it right into reserves at the Fed. Thus the new monetary base doesn’t enter the real economy, and it doesn’t become actual monetary supply, so no problem.
Just a powder keg that Bernanke claims he is “100%” confident he can control when it starts to burn a hole in banks pockets and they start to turn theoretical monetary base in actual monetary supply. Say, as soon as rates rise 50bps and the Fed stops paying interest on excess reserves.
I don’t disagree with what BB is doing, although there seems to be risk without a lot of reward from the QE, but since that’s the only tool he has left, boom goes the dynamite.
In the end, that may be worse than actually printing money – less transparent, less understood, and more hidden risk simply glossed over.
I think the intended effect is twofold – pre-capitalize banks for further inevitable loan losses (the most un-precedented rise in real estate prices in history, except perhaps during tulip-mania, has yet to fully correct) as well as deliberately weaken the dollar. All recoveries in the past have been led by manufacturing. Unfortunately cetain tax policies have all but gutted what remains of this base, it essentially no longer exists to lead us out of this recession.
In Bernanke’s previous 60 Minutes interview he readily acknowledged that he was printing money. Some observations on why he changed tactics (and why he continues to be nervous when on tv):
http://www.polycapitalist.com/2010/12/vi deo-ben-bernanke-interview-on-60.html