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Bernanke Punts

Gets ball back next week.

12:00 AM, Sep 1, 2012 • By IRWIN M. STELZER
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Here is an easy way for any non-economist to tell whether an economy is in dire straits: If investors are looking to their central bankers to get them out of the mess created by over-borrowing, ineffective regulation, and political paralysis. Markets unwilling to lend money at reasonable rates? No problem. Federal Reserve Board chairman Ben Bernanke, Bank of England governor Sir Mervyn King, and European Central Bank president Mario Draghi will drive interest rates down. Banks with near-worthless assets included on their balance sheets as if they could be sold at face value? No problem. Your central banker will go along with the fiction. Mortgage rates too high to get the housing sector back to health? Don’t worry, be happy. Your central banker will try to offset banks’ tighter credit standards by buying up mortgages to keep rates down.

Ben Bernanke

Ben Bernanke

Of course, if you are a saver rather than an over-borrowed consumer, you should not be happy, and should worry, because your savings and pension accounts will earn interest rates so low that inflation will push them into negative territory. And if your range of vision takes you beyond the next day’s share trading, you might worry that some of that money being printed might end up in the bushel basket in which you will tote it to the grocer. Well, not quite: such visions of history repeating itself are still confined to Germany—and, of late, Argentina. But you are entitled to view with more than a little skepticism central bankers’ claims that if they see the inflation genie gaining strength, they will know how to keep it in its bottle. In Paper Promises, Philip Coggan notes in his detailed survey of the history of monetary policy, “Paper money systems have always led to rapid inflation in the past.”

If we ever needed a lesson in the dangers of relying on central bankers to right stricken economies, we are getting one now. In the week now ending, America’s financial markets in essence paused, waiting to hear what Bernanke was planning to do to get an economy that grew at an annual rate of a mere 1.7 percent in the second quarter moving at a rate that would give the 23 million Americans in need of full-time work a better chance at finding jobs. Focus on the Fed distracts from attention to the underlying problems of excessive deficits, a tax system that is forcing companies to relocate overseas (10 public companies have already done so, several saving over $100 million per year in taxes), and a labor market that now contains millions whose skills have atrophied or are no longer relevant to a globalized economy.

Perhaps the strangest aspect of waiting for Bernanke is this: When the economic news is bad enough, Bernanke eases, and the bad news ends up driving up asset prices. But when the economic news is on the bright side, he sees no need to ease, resulting in a fall in the price of shares and other assets.

Perverse effects such as this, plus concern that the Fed cannot simultaneously meet its dual mandates—full employment and price stability—led Republicans, in convention assembled, to establish a committee to ponder three reforms: returning to the gold standard, dropping the full employment mandate, and instituting congressional “audits” of Fed monetary policy. If Congress does pass legislation giving it power to audit monetary policy, Bernanke will leave office 17 months from now with an unwanted legacy: the man who ended Fed independence. 

In the event, Bernanke argued in his Jackson Hole speech that the Fed’s monetary policy has “provided significant help for the economy,” promised to act to promote growth as needed, and suggested that he favors keeping rates low for a longer time than so far announced. He also expressed disappointment at the rate of improvement in the labour market, and promised to “provide additional policy accommodation [read, “easing”] as needed to promote a stronger economic recovery,” one that will drive the unemployment rate down by about two percentage points from its current level of 8.3 percent.

Still, no announcement of easing just yet. Bernanke played Bumble to the please-sir-I-want-some-more-easy-money-now crowd. They came away with their begging bowls empty, and will have to wait for the September 12-13 meeting of the Fed’s monetary policy committee for another portion of easing, by which time the committee will have available to it next Friday’s jobs report. 

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