Opinion

Gregg Easterbrook

Bernanke raises the curtain on the Federal Reserve

April 27, 2011

Only the Pope guest-hosting Saturday Night Live could top, in public-relations terms, what just happened in Washington — Fed Chairman Ben Bernanke gave a press conference, the first time a Fed chair has stood before reporters to take questions. And maybe Benedict XVI should film an Internet intro to St. Peter’s, since Bernanke just posted an intro to the Vatican of money.

And what a press conference! It began exactly on time. The mood was sedate, the questions softly spoken and polite. Bernanke didn’t take the bait when a reporter asked what he thought of “many economists” calling Fed policy ineffective; there was no snarky follow-up. Recent presidents could only dream of presiding over such a respectful press conference.

Traditionally, Fed chairs have spoken in public only to read a prepared speech — often, cloaked in mumbo-jumbo — or to present congressional testimony. Fed chairmen’s appearances before congressional committees have tended to be dominated by representatives and senators who want to hold the floor, and the cameras’ attention, as they engage in long-winded self-flattery. Sharp, concise questions of the sort asked by reporters are rare in congressional hearings.

Otherwise, Fed chairmen have cultivated an aura of secrecy, so much so that William Grieder’s 1989 book about the Fed was titled, “Secrets of the Temple“. Some believe that Fed chairmen cultivate a secretive air in order to mystify themselves; or because a high-and-mighty atmosphere helps the Fed function properly; or because they fear slipping up and revealing that they are not the super-ultra geniuses they’d like us to believe.

Now Bernanke is raising some of the curtain. Maybe he simply believes the Fed should be more accountable to the public — if so, more power to him. Asked today about ambiguity in Fed pronouncements, Bernanke replied, “the reason we use vague terminology is that we don’t know” what will happen next in the economy. He followed up later by saying he simply doesn’t know when “tightening” will occur because he doesn’t know what course the economy will take. He said “everybody who reads the newspapers” knows about the same information the Fed knows. This is admirable honesty from an institution with a tradition of pretending to be oracular.

Maybe Bernanke is raising the curtain because he fears the Federal Reserve being blamed for a role in Washington’s breathtaking borrowed-money giveaway, as enabler of the $14 trillion — and counting — national debt.

The Fed has engaged in $1.7 trillion of printing money in the last two years, insisting on the euphemism “quantitative easing.” Since the Washington red-ink tide began in 2008, the Federal Reserve has kept the federal funds rate to banks “exceptionally low,” in Bernanke’s words, below 1 percent. Banks borrow from the Fed at nominal charge and use the funds to purchase Treasury bills — providing effortless profit to banks, while giving the federal government dollars to spend that appear to come from private sources but actually are money-printing by the Fed. When Bernanke referred today to the Fed’s “highly accommodative monetary policy,” this is what he meant.

Inflation almost has to result. Indeed, Bernanke said today the Fed worries about deflation and does not want inflation at zero, rather, at a “goal” of about 2 percent. Imagine telling Paul Volcker in the early 1980s that the Fed was worried about reaching a goal of causing more inflation! Bernanke in December 2009 said it was “very unlikely” the Fed’s printing-money policy would cause inflation; the Fed reiterated this belief today, in advance of Bernanke’s press conference.

But though low inflation is wonderful — inflation hurts the average person far more than does slow growth — it’s hard to believe all this borrowing and money-printing won’t cause inflation to spiral out of hand. “To get a long-term, sustainable recovery, we’ve got to keep inflation under control,” Bernanke said today.

David Einhorn, among Wall Street’s most accomplished shorts, thinks inflation has already begun, but is being understated by federal formulas — because Washington so badly needs the Fed to keep providing nearly interest-free money. Bad as the federal deficit is now, bear in mind that even modest inflation would add $500 billion or so annually to debt-service cost on the national debt, while triggering big increases in Social Security benefits.

Probably Bernanke’s “very accommodative” monetary policy helped soften the recent recession; surely it pleased George W. Bush and Barack Obama, Bernanke’s patrons, allowing them to spend lavishly without accountability. But will there be harsh costs, as inflation and other problems, that won’t manifest until current Washington policymakers leave their posts?

After all, the Federal Reserve has resorted to emergency measures — an extended period of extremely loose money — when the national economic condition is nowhere near as bad as it’s been in the past, and when global economic fundamentals are sound (no resource shortages, no superpower conflicts, tariffs and trade barriers in decline).

If years of really loose money — almost unlimited free money to Washington and the big banks — is needed to keep the economy growing when overall conditions are positive, what arrow is left in the quiver if a genuine emergency occurs?

The Fed can’t cut interest rates any lower, doesn’t dare print any more money — it said as much today — and couldn’t be taking any greater chances with the future. The arrows have been shot and the quiver is empty. Let’s hope no genuine emergency occurs.

At least we finally have a Federal Reserve chairman willing to explain himself to the public.

Photo: U.S. Federal Reserve Chairman Ben Bernanke takes his seat prior to his first-ever news conference following a Fed meeting at the Federal Reserve in Washington April 27, 2011. The Federal Reserve signaled Wednesday it is in no rush to scale back its extensive support for the U.S. economy, while slightly downgrading its view of the economy’s recent performance. REUTERS/Jason Reed

Comments
6 comments so far | RSS Comments RSS

When the Federal Reserve and other Federal government agencies talk about inflation, their talk is complicated by the fact that energy and food prices don’t really count — even though that’s where price increases show up. It is also the case that one way companies kept prices from rising over the last 10 years or more was by moving manufacturing overseas to low-labor-cost areas. That reduced the amount of value generated within the American economy, thus making the country poorer. But that is not the fault of the Federal Reserve, and there is nothing the Fed can do about it. As for inflation, certainly, I feel that our family expenses are substantially higher than they were a year or so ago, even though we are buying the same kind of stuff (which includes gasoline and food).

Posted by Bob9999 | Report as abusive
 

I’d love to comment, but really don’t have anything to add.

You’ve covered it extremely well Gregg.

This piece should run in every newspaper in the country.

Thank You,

MIA

Posted by Missinginaction | Report as abusive
 

What would a weak dollar policy look like?

Posted by tradingdaze | Report as abusive
 

The Fed was created to be politically independent for a reason. We see with painful clarity how politicians are bought by special interests. Populist monetary policy would be a disaster. Let’s hope Mr Bernanke doesn’t make this press conference gig a habit.

Posted by mheld45 | Report as abusive
 

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