Bernanke raises the curtain on the Federal Reserve
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. Peterâ€™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 didnâ€™t take the bait when a reporter asked what he thought of â€śmany economistsâ€ť 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 chairmenâ€™s appearances before congressional committees have tended to be dominated by representatives and senators who want to hold the floor, and the camerasâ€™ 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 Griederâ€™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 theyâ€™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, â€śthe reason we use vague terminology is that we donâ€™t knowâ€ť what will happen next in the economy. He followed up later by saying he simply doesnâ€™t know when â€śtighteningâ€ť will occur because he doesnâ€™t know what course the economy will take. He said â€śeverybody who reads the newspapersâ€ť 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 Washingtonâ€™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 â€śquantitative easing.â€ť Since the Washington red-ink tide began in 2008, the Federal Reserve has kept the federal funds rate to banks â€śexceptionally low,â€ť in Bernankeâ€™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 Fedâ€™s â€śhighly accommodative monetary policy,â€ť 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 â€śgoalâ€ť 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 â€śvery unlikelyâ€ť the Fedâ€™s printing-money policy would cause inflation; the Fed reiterated this belief today, in advance of Bernankeâ€™s press conference.
But though low inflation is wonderful — inflation hurts the average person far more than does slow growth — itâ€™s hard to believe all this borrowing and money-printing wonâ€™t cause inflation to spiral out of hand. â€śTo get a long-term, sustainable recovery, weâ€™ve got to keep inflation under control,â€ť Bernanke said today.
David Einhorn, among Wall Streetâ€™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 Bernankeâ€™s â€śvery accommodativeâ€ť monetary policy helped soften the recent recession; surely it pleased George W. Bush and Barack Obama, Bernankeâ€™s patrons, allowing them to spend lavishly without accountability. But will there be harsh costs, as inflation and other problems, that wonâ€™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 itâ€™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 canâ€™t cut interest rates any lower, doesnâ€™t dare print any more money — it said as much today — and couldnâ€™t be taking any greater chances with the future. The arrows have been shot and the quiver is empty. Letâ€™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