Bernanke's Speech of the Day

Here is the link to the text of the Bernanke speech [in London this morning]. It is a very long and very professorial exegesis of the credit crisis and the response of the Federal Reserve to the crisis.

Here are a couple of points:

He describes how the Federal Reserve can influence interest rates and have market impact even though the funds rate is virtually zero. He notes three policy levers which each act to lower rates. The Fed can lend directly to financial institutions. The Fed can provide liquidity to markets. The Fed can buy long term securities.

He differentiates the current Fed stance from the QE regime which prevailed in Japan earlier in the decade. The difference, as he sees it, is that QE is focused on bank reserves. That is not the case with current Fed policy, which is more concerned with credit spreads. He stated that there was no doctrinal difference between the Fed and the BOJ and the difference arose because the US credit markets had turned dysfunctional and that had not happened in Japan.

He is not worried about inflation.

And he is not worried about an exit policy. The Fed could do massive match sales or the Treasury and the Fed together could drain reserves via reinstitution of the program by which Treasury issues bills and deposits proceeds at the Fed.

I thought he would discuss policy triggers for purchasing long term securities. He did not.

One additional point. He briefly tackles the problem of too big to fail. He makes the following statement:

It is unacceptable that large firms that the government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period.

The Federal Reserve and every other regulator and organ of public policy making allowed, acquiesced and encouraged concentration of capital and risk taking. So his statement reminds me of the famous line in Casablanca in which Captain Renault is shocked to find out that there is gambling at Rick’s Place. It is disingenuous at best and self delusional at its worst.

Comments

[DiggerUK:]

I have just watched Bernanke deliver this speech on Bloomberg.
If it can't be seen on their podcast, then I am sure it will be on YouTube.
You will also see the question session that follows.
Bloomberg also interviewed William "Bill" Poole, the former President of the St. Louis Fed following the broadcast.

Nobody asked if he thought he was debasing the $. Maybe that is something everybody is accepting as fact. A must watch.

Naked emperors should be feared. Especially if they are speaking on behalf of the biggest debtor nation in world history.

Jan 13 09:37 AM

[Moon Kil Woong:]

Bernake is always filled with doublespeak. I think he thinks it helps give him a Greenspanish aura of mystique. He supports a strong dollar but dumps money into the system. he supports inflation and easy money then sucks the pond dry offering interest on fed deposits and practically screams to banks to park all their money with the fed taking it off the market and putting it on the sidelines.

He says you just need to dump money from a helicopter to fight deflation, then proceeds to suck money from the Armerican public and feed it to the banks by helping buy up all their bad debt. It is for your own damn good he says. Right....

Bernake is either the biggest dolt in the universe or makes Stewie blush in envy. In either case, what he is doing isn't good for either you or me.

Whatever he says expect the opposite. I'm against big corrupt gambling financial institutions probably means, we need to funnel more TARP money to Citibank and big corrupt gambling financial institutions again. If you call him on it he will say, "I said too big to fail. I meant we shouldn't but they were too big to fail as I said in my speech 1/13/09."

That's the real Bernake bankers know and love.

Jan 13 11:02 AM

[BK GUY:]

While it is true that we need a working COMMERCIAL banking system for the economy to function, there is no reason why we need ANY particular bank for that system to function. Why not use the printing presses to protect depositors, or shore up the capital of the responsible, prudent banks? Make the "good" banks stronger -- let the "bad" banks fail. Confidence cannot be restored to the passengers as long as the crooks and thieves continue to drive the car.

Jan 13 11:20 AM

[Drew Horn:]

Benanke appears to view financial market gyrations as an academic case study. He focuses on the feds issues and actions and never get around to saying what fed / treasury programs are supposed to actually accomplish. That's probably because he took the job thinking it would be a comfortable place to finish his career but found that he is in over his head and it isn't quite as comfortable as he expected.

Financial markets are not in an academy. Bernanke needs to get out of his ivory tower and accept that we have a recession and monetary manipulation won't help much. Fiscal policy is the only chance to change things but that seems to be mucked up as well.

Jan 14 11:04 AM