The Fed's Bernanke: Hubris and Dissimulation
(The New American) -- by Bob Adelmann --
Fed Chairman Ben Bernanke’s recent 60 Minutes interview raised more questions than it answered. Some even questioned the questions. Gary North explained that the Fed chair was being pushed to defend his decision to purchase more government securities in order to stimulate the economy. Interviewer Scott Pelley was at an admitted disadvantage, and failed to ask Bernanke exactly why he thought additional stimulating would work when past stimulations haven’t.
As North suggested, Pelley should have asked Bernanke “Why?”
"Why do you think that a reduction of the 10-year T-bond rate, if it even happens, will be sufficient to get banks lending again and businesses hiring again?"
Instead, Pelley asked this:
"The major banks are racking up profits in the billions. Wall Street bonuses are climbing back up to where they were. And yet, lending to small businesses actually declined in the third quarter. Why is that?"
And Bernanke punted:
"A lot of small businesses are not seeking credit, because, you know, because their business is not doing well, because the economy is slow. Others are not qualifying for credit, maybe because the value of their property has gone down. But some also can’t meet the terms and conditions that banks are setting."
And so Pelley let Bernanke off the hook, leaving unanswered why banks aren’t lending even though they are holding enormous reserves, and especially why if those reserves were increased through the increased purchases of government debt that banks would be more inclined to loan them out.
The answer that Bernanke should have provided in the interest of transparency is that he really doesn’t have any idea. At the moment, banks are very happy investing their reserves at two or three percent by buying government securities, while borrowing them from the Fed at close to zero. That’s called “milking the spread,” and explains how the banks continue to profit despite not making loans to small businesses.
The other answer as to why Bernanke thinks continued purchases of government debt will work is because the Fed has nothing else it can do and it certainly must not give the appearance of doing nothing, or admitting that it is out of options.
Pelley then asked Bernanke about the risk of inflation as a result of the increase in the money supply because of these Fed purchases. Bernanke makes two mistakes here. He claims that there isn’t any inflation. And then he claims that if there were any inflation, he knows what to do about it. The interchange is remarkable:
Pelley: Many people believe that [the $600 billion program] could be highly inflationary. That it’s a dangerous thing to try.
Bernanke: Well, this fear of inflation. I think it is way overstated. We’ve looked at it very carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re doing is printing the 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.
First of all, the inflation has already taken place. A quick review of the Fed’s own graph of the M1 money supply over the past five years reveals that money supply has grown by nearly a third, while the one-year chart is equally un-nerving. So the inflation of the monetary base of the economy has already taken place, and Bernanke wants to add to it.
When Bernanke says that the fear of inflation is way over-stated, he is talking, in Fed-speak, about the eventual, inevitable rise in prices that will take place over time. This is measured by another Fed chart with which Bernanke is well-acquainted, the velocity of money which has declined sharply since the onset of the Great Recession, and is just now beginning to stir upwards. This sharp decline in velocity has masked, for the present, the massive monetary increases just waiting to enter the economy...MORE...LINK