Ben Bernanke – Mythbuster

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Bernanke needs to do more of this: Debunking myths about savers, currency, fiscal policy enabling, monetizing the debt, creating inflation, and operating in secrecy. Bravo.

Joe Weisenthal over hos Business Insider er meget godt fornøyd med en tale den amerikanske sentralbanksjefen holdt ved Economic Club of Indiana mandag.

Hvorfor var akkurat denne talen så spesiell? Han og andre medlemmer av hovedstyret gir taler hele tiden, i forskjellige fora.

Vel:

Myths about the Fed are legion (repeated ad nauseam by pundits and politicians) and it seems that Bernanke realizes that the more exotic Fed policy becomes, the more he must inevitably debunk memes in order to justify his actions.

Utgangspunktet er at kontrasten mellom anklagene mot Bernankes handlinger og hans forsvar er rimelig stor.

Så når Bernanke slår det miste tilbake legges det merke til. Selv når det foregår i svært sentralbankede former.

Joe:

The first big one that Bernanke debunked is the idea that the Fed is an enabler of fiscal profligacy. This is something you hear all the time, and it’s total nonsense.

Even though our activities are likely to result in a lower national debt over the long term, I sometimes hear the complaint that the Federal Reserve is enabling bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow. I find this argument unpersuasive. The responsibility for fiscal policy lies squarely with the Administration and the Congress. At the Federal Reserve, we implement policy to promote maximum employment and price stability, as the law under which we operate requires. Using monetary policy to try to influence the political debate on the budget would be highly inappropriate. For what it’s worth, I think the strategy would also likely be ineffective: Suppose, notwithstanding our legal mandate, the Federal Reserve were to raise interest rates for the purpose of making it more expensive for the government to borrow. Such an action would substantially increase the deficit, not only because of higher interest rates, but also because the weaker recovery that would result from premature monetary tightening would further widen the gap between spending and revenues. Would such a step lead to better fiscal outcomes? It seems likely that a significant widening of the deficit—which would make the needed fiscal actions even more difficult and painful—would worsen rather than improve the prospects for a comprehensive fiscal solution.

This is really meaty, so let’s unpack what’s above.
One is that the Fed looks at basically two factors — employment and prices — when it decides how, when, and where to act. Unlike the ECB, the Fed does not use monetary policy as a stick in any way to influence fiscal policy.

He then turns to a related point, which is that the Fed is somehow «monetizing the debt» — printing money so that the government doesn’t have to legitimately pay off its obligations.

With monetary policy being so accommodative now, though, it is not unreasonable to ask whether we are sowing the seeds of future inflation. A related question I sometimes hear—which bears also on the relationship between monetary and fiscal policy, is this: By buying securities, are you «monetizing the debt»—printing money for the government to use—and will that inevitably lead to higher inflation? No, that’s not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates. At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, to return its balance sheet to a more normal size. Moreover, the way the Fed finances its securities purchases is by creating reserves in the banking system. Increased bank reserves held at the Fed don’t necessarily translate into more money or cash in circulation, and, indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years.

This is key. If the Fed were monetizing the debt, then it would rip up the Treasuries it buys, so that the government doesn’t have to pay them off. As it is, these debts don’t go anywhere. The amount the government owns remains the same. Furthermore, because for every dollar the Fed «prints» via QE, an equivalent dollar is removed from the system, and so there’s no more money in the system.

That last line is key: «Increased bank reserves held at the Fed don’t necessarily translate into more money or cash in circulation, and, indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years.»

Bernanke then quickly debunks the idea that when inflation comes that it won’t be able to address it. People believe that the massive unwind of the Fed’s balance sheet would be so devastating, and that therefore the Fed is out of tightening tools.

Hogwasy says Bernanke:

For controlling inflation, the key question is whether the Federal Reserve has the policy tools to tighten monetary conditions at the appropriate time so as to prevent the emergence of inflationary pressures down the road. I’m confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way. For example, the Fed can tighten policy, even if our balance sheet remains large, by increasing the interest rate we pay banks on reserve balances they deposit at the Fed. Because banks will not lend at rates lower than what they can earn at the Fed, such an action should serve to raise rates and tighten credit conditions more generally, preventing any tendency toward overheating in the economy.

Finally he gets on to one of the most powerful critiques of the Fed: The idea that it’s screwing savers.

As he notes, low rates are not just about Fed policy, they’re about the incredible economic events that have happened around the world post financial crisis:

I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve’s monetary policy, are in a larger sense the result of the recent financial crisis, the worst shock to this nation’s financial system since the 1930s. Interest rates are low throughout the developed world, except in countries experiencing fiscal crises, as central banks and other policymakers try to cope with continuing financial strains and weak economic conditions.

He then goes onto note that saving isn’t just «having money in a bank» and that the main way to benefit everyone (including savers) is to induce growth:
A second observation is that savers often wear many economic hats. Many savers are also homeowners; indeed, a family’s home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and—through pension funds and 401(k) accounts—they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates.

The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else.

Bernanke needs to do more of this: Debunking myths about savers, currency, fiscal policy enabling, monetizing the debt, creating inflation, and operating in secrecy. Bravo.

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