Opinion

The Great Debate

Yellen vs. the Fed critics

The confirmation hearing of Federal Reserve Chairwoman nominee Janet Yellen on Thursday will be an opportune moment for Fed critics to air their grievances.  There is plenty of fodder for disagreement and debate — ranging from the Fed’s supervisory track record, to the rules for tapering large-scale asset purchases, to the criteria for ending its zero-interest rate stance.

Yet, one sure criticism is sharply at odds with the facts: That the Fed’s crisis response was an insider affair, run by and for a handful of too-big-to-fail banks.

While the Fed’s actions in response to the 2008 financial crisis are certainly open to criticism, the creation and expansion of various credit and lending programs were aimed at calming the financial markets and maintaining the liquidity of specific financial instruments. It was not about befriending winners and giving the cold shoulder to losers.

The exception that proves the rule was the Fed’s early institution-by-institution firefighting; for example, addressing the problems of Maiden Lane I-III, Bear Stearns and American International Group. In each of these cases, the Fed provided support to individual firms in order to avoid a disorderly collapse. However, as a financial “disturbance in the force” started to move through the system — slowly at first, and then rapidly — the Fed attempted to provide liquidity with the hope of containing the disruption.

The Fed was practicing an amped-up version of its lender of last resort role by “lending freely, against good collateral,” as prescribed by Walter Bagehot’s famous 1873 dictum.

Ending the debt limit crisis: Dear Ben Bernanke

Warren Buffett calls the debt ceiling a “nuclear weapon, too horrible to use.” Obama administration official Jason Furman says the consequence of a default on U.S. government debt is “too terrible to think about.” When asked about a default, Wells Fargo strategist James Kochan simply commented, “Holy cripes.”

With this crisis, America is risking financial Armageddon. The default of Lehman Brothers on its $613 billion of debt ignited a chain reaction in the financial system, nearly destroying the U.S. economy. A default by the U.S. government on $17 trillion of debt — debt that has been considered the safest in the world — could be far worse.

But at heart, this is not a debt problem. It is an accounting problem. The Treasury Department issues U.S. debt, and lots of it. So you would think that America is deeply indebted to its bondholders. Yet increasingly, it is the U.S. monetary authority, the Federal Reserve, and not private investors, who buys this debt.

Yellen: An economic tonic for the sluggish recovery

The money markets rejoiced when Larry Summers pulled out of the race to be Federal Reserve chairman. The reason was simple, self-serving and not necessarily wholesome: A different chairwoman — most likely Janet Yellen — would be more inclined to continue the Fed’s program of large-scale bond purchases and low interest rates.

Stock and bond markets, of course, love low interest rates. Cheap rates on bonds push stock values up as investors seek higher returns. Interest rates and bond prices move inversely — so cheap money keeps bond prices high. And low interest rates are good for mortgage demand and housing prices.

But low interest rates, in the absence of offsetting regulatory policies, can also create financial bubbles — as we all learned the hard way in the run-up to the financial collapse of 2008. For some critics, the Fed’s current low interest rates are now creating bubble conditions in foreign exchange and other speculative markets.

It’s too soon to taper

The chatter has it this week that the U.S. Federal Reserve Bank will allow its $85 billion a month bond buying program to wane, with the eventual death of quantitative easing and a return to economic normalcy. Not only is it too soon for the Fed to back off, it’s too soon to even be discussing it. The global economy is extraordinarily fragile. We need solutions that are more radical than QE, not a retreat into orthodoxy.

The global economy is threatened by conditions in both developed and emerging markets. In the U.S. and Europe, debt has been transferred from the private to the public sectors and debt levels have climbed faster than economic growth has been able to keep pace. The G7 nations borrowed $18 trillion since the financial crisis and have only $1 trillion in economic growth to show for it.

Meanwhile, both private and public borrowers in the emerging markets have larded up on cheap debt, much of it denominated in dollars and euros. They are borrowing in other currencies and paying with their own, leaving corporate and government treasuries vulnerable to currency shocks, just like we saw during the Asia Crisis of the 1990s.

After healthcare ruling, conservatives again misplace their ire

Last week’s ruling by Chief Justice John Roberts that the Affordable Care Act is constitutional has thrown conservatives into consternation. Rick Santorum says he is “very disappointed … It was a folly of a mistake.” Conservative radio host Michael Savage suggests Roberts must be on mind-altering medication. Even those, like John Boehner, who said they respected his jurisprudence disagreed with his decision.

Roberts now finds himself in the same bad standing with conservatives as Fed Chairman Ben Bernanke. Bernanke’s credentials as the heir to Milton Friedman, Ronald Reagan’s monetarist guru, have not been enough to save him from abuse either. When good conservatives like Roberts and Bernanke are traduced by their own side for being closet liberals, letting Barack Obama introduce European social democracy through the back door, something strange is afoot in the conservative universe.

The definition of a conservative used to be someone who values institutions above all as the bulwark against tyranny. That is the lesson left by the father of conservatism, Edmund Burke. But America’s most valued institutions, and those who operate them, are under attack from the very people who at one time would have been their stoutest defenders. People who like to call themselves conservatives, and set themselves up as arbiters of who is a true conservative, now despise the very institutions that safeguard our fragile freedoms from tyranny.

Fed up with Bernanke

By Nicholas Wapshott
The views expressed are his own.

There is one thing every Republican candidate agrees on. Once in the White House, the first thing they’d do is fire Ben Bernanke. His crime is to follow the legal brief of the Federal Reserve to maximize jobs and keep prices stable. To this end he has been printing money to keep interest rates low to boost business confidence to invest and thereby create more American jobs. For many conservatives and libertarians, who dominate the early GOP caucuses and primaries, Bernanke’s cheap money policy has dangerously devalued the dollar’s worth.

Guaranteeing cheap money is a Keynesian way of restoring health to an economy in recession, though Keynes himself was aware that low interest rates do not automatically lead to jobs. However cheap money is, you can’t force people to invest. Or, as he put it, “You can’t push on a string.” He compared it to buying a bigger belt to gain weight. The fact that Keynes backed easy credit is enough to make the policy treacherous in the eyes of many con-libs. (They are far more tolerant of another Keynesian remedy–slashing taxes.)

Bernanke, however, owes his allegiance not to Keynes but to Milton Friedman. To encourage growth without hyper-inflation, Friedman prescribed gradually increasing the money supply. That way, prices would rise slowly and predictably. Bernanke is also an expert on the 1929 Crash and the Great Depression, catastrophes he, like Friedman, attribute to the 1920′s Fed keeping money too tight for too long. As Bernanke told Friedman on the father of monetarism’s 90th birthday, “You’re right. We did it. We’re very sorry. But, thanks to you, we won’t do it again.”

Bernanke’s high stakes poker game at the G-20

By Peter Navarro
The opinions expressed are his own.

Ben Bernanke is about to play the biggest poker hand in global monetary policy history: The Federal Reserve chairman is trying to force China to fold on its fixed dollar-yuan currency peg. This is high-stakes poker.

Although Bernanke will not be sitting at the table to play his quantitative easing card when all the members of the G-20, including China, meet this week in South Korea. Every G-20 country is suffering from an already grossly under-valued yuan pegged to a dollar now falling rapidly under the weight of Bernanke’s QE2. In fact, breaking the highly corrosive dollar-yuan peg is the most important step the G-20 can take for both robust global economic recovery and financial market stability.

Regrettably, China continues to believe — mistakenly — that the costs of a stronger yuan in terms of reduced export-led growth outweigh three major benefits: increased purchasing power to spur domestic-driven growth, significantly lower costs for raw materials and energy, and a dramatic reduction in speculative hot flows rapidly pushing up inflation.

Savers shoulder the inevitable burden of bad loans

Britain’s new coalition government likes to remind voters we are all in this together. The phrase is rather glib. But in an important sense savers and borrowers around the world are finding the costs of reckless lending are falling on the innocent and guilty alike.

Few people this century will have experienced what it is like to turn up at their bank and be told they cannot withdraw deposited funds because the bank has “suspended” payments.

Suspension sounds harmless. But before the spread of deposit insurance, the word was enough to strike fear into the hearts of depositors, who risked losing much if not all their life savings, and being made to wait months or years for access to what remained.

Fed launches QE-lite

In a compromise, the Federal Open Market Committee (FOMC) has approved a cautious and conservative second round of quantitative easing (QE2) which may satisfy nobody but should prevent internal splits from widening.

It is designed to provide some marginal stimulus to asset markets and economic recovery without further undermining the confidence of foreign investors.

The best way to characterize the $600 billion bond-buying program implemented over eight months is “QE-lite”. The total is slightly higher than expected, but spread over a slightly longer period. The Fed has done almost exactly what it signaled over the last few weeks — no more (there was no “shock and awe”) and no less.

Fed is split but QE2 looks a done deal

- The opinions expressed are the author’s own-

FOMC meetings are usually a strange combination of formality and easy-going familiarity but levity may be in short supply this week. The Fed’s institutional credibility is on the line, and the normal decorum that characterizes relations among committee members has become increasingly strained over the summer.

Divisions between proponents and opponents of a second round of quantitative easing (QE2) have been on display as never before. It is not clear what members will say to one another to fill two days since all the arguments have already been rehearsed in detail and in public over the last six weeks.

In a thinly veiled swipe at his colleagues, Kansas City Fed President Thomas Hoenig has stumped around his patch on the Great Plains denouncing QE as a “dangerous gamble” and “a bargain with the devil”.

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