Bernanke Is a Man with a Plan

Federal Reserve Chairman Ben Bernanke is with the House Financial Services Committee this morning talking about the prospects for the U.S. economy and a host of other related issues. It's still going on and you can watch it at CSPAN.

The prepared remarks can be found over at the Fed's website, highlighted by a few thoughts on the bill sponsored by Rep. Ron Paul (R-Texas) to audit the central bank. Recall that the General Accounting Office (GAO) has long maintained the authority to audit the Federal Reserve, but only in certain areas:

The Congress, however, purposefully–and for good reason–excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy. Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability. We will continue to work with the Congress to provide the information it needs to oversee our activities effectively, yet in a way that does not compromise monetary policy independence.

While most members of Congress who support the bill are more interested in finding out details about who the central bank is lending money to and how much, the Fed again redirects the discussion toward independence in setting monetary policy. No surprise there.

The 56-page Monetary Policy Report to Congress(.pdf) was also released today - that might make for some good bed-time reading.

It's been a relatively quiet few weeks for the Fed Chairman, so he found time to write the Wall Street Journal op-ed piece that appears in today's paper. [Emphasis mine.]

The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.

These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credit markets, including the markets for interbank lending, commercial paper, consumer and small-business credit, and residential mortgages.

My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.

The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed.

But as the economy recovers, banks should find more opportunities to lend out their reserves. That would produce faster growth in broad money (for example, M1 or M2) and easier credit conditions, which could ultimately result in inflationary pressures—unless we adopt countervailing policy measures. When the time comes to tighten monetary policy, we must either eliminate these large reserve balances or, if they remain, neutralize any potential undesired effects on the economy.

He goes on to make it sound so easy...

Comments

[Whippet:]

To use "independence over monetary policy" as a bromide defense for hiring LOBBYISTS to kill Ron Paul's bill is an affront to the intelligence of hardworking Americans (sans banksters, of course.) The Fed and Treasury have long since handed our monetary policy to a cabal including the Chinese, the Oil States, Japan, Russia, and Western Europe. The tacit Bretton Woods II agreement makes the Fed a "yes, massah" money-printing servant of the insatiable Kongress. Our dollar has value as long as it remains a reserve currency, as long as it is the denomination of the world's debt assets. Not a moment longer. Do we honestly think the Fed will stop buying Treasuries when they come to auction at a clip of $100 billion a MONTH? Our deficits are skyrocketing, and the world's buyers are starting to say no. We'll have to shut down the Federal Gov't or see interest rates between 10-30%. Or, just commandeer the Kleenex plant and print Benjamins on toilet paper rolls.
Everything is moving in the Same Direction!
The only answer is (hyper)inflating the debt away.
Bretton Woods 2 will die like Bretton Woods 1- by executive fiat. But we won't determine when this one ends. And when it ends, it won't be pretty...

Jul 21 03:00 PM

[Whippet:]

True. Ceteris paribus, this is true.
The problem is that these Experiments are not being carried out in a laboratory. Here are some external variables that could screw up the Experiment:
1) CRE and Alt-A/Option ARM collapses;
2) Massive government expansion that needs to be funded at >$100 Billion a month;
3) Reluctance of continued Developing World Debt Financing ("Bretton Woods 2");
4) A secular change in economic growth (aka bombed projections);
5) Credit contraction due to rising interest rates


On Jul 21 02:52 PM HardwoodFlooring wrote:

> The Fed expanded it's balance sheet by a billion dollars six months
> ago. Since then nothing. However, it has also required that Banks
> (Wall Street and Regional Banks) increase their Loan reserve requirements.
> Those assets are, today, required to be held at the Fed. What is
> interesting is that while the Fed bailed out the system in the fall
> they did so by making the banks deleaver- bringing in loan loss reserves-
> but had those loan loss reserves placed at the Fed so the net effect
> is that the FED put no liabilities on the balance sheet. Once the
> economy seems stable they will be able to do two things 1) raise
> interest rates and by effect of one 2) be able to return the loan
> reserves to the banks thus, making the interest rate hike negligible
> because the banks will then have a good base from which to go our
> and develop new business- albeit with higher interest rates.
>
> Thus mitigating the risks of inflation down the road. To the guy
> with the "gold buy" recomondation if you are betting on commodities
> long-term- I think your mistaked.
>
> It's genius. I think your little cartoon is apropos.

Jul 21 03:07 PM

[Barbarous R...:]

So when banks eventually become motivated lenders and creditworthy citizens motivated borrowers -- the Fed is simply going to take policy action to discourage lending.

And this won't send a fragile economy into the tank? And the Obama Administration will allow this kind of policy action? At a time when government borrowing needs will also be soaring? Call me a skeptic.

In all likelihood, very aggressive Fed action will be required, and nobody will do it for fear of returning us to severe recessionary conditions. Obama will be striving for re-election amid stubbornly high unemployment and rampant tax hikes. I suspect that $100+ oil and rising food prices will be of secondary concern.

Good luck Ben!

Jul 21 03:23 PM

[Annualgain:]

A man, a plan, a canal, panama
style inflation.

Jul 21 03:29 PM

[Poor Texan:]

Hardwood Flooring: Forget about the market for a minute. Forget about the financial shenanigans going around. Like a president once said, "It's the economy, stupid". You can forget increasing tax revenues with businesses running at a loss, large unemployment, and employed people looking for ways to "optimize" their tax situation because there are too many bills to pay. I've been through many bad times over the past seventy years and I'm sorry to say we're looking at more coming.

Jul 21 03:30 PM

[HardwoodFlo...:]

Thnks Texas for distilling it down. I agree the government involved makes for one big cock-up.

Jul 21 04:13 PM

[puravidavid...:]

When massive new liquidity is meant to prop-up festering and growing insolvency, the last bubble is waving, "Goodbye!"

Hyperinflation may be sacroscant for gold bugs, but it is difficult when most of the money supply is credit, not currency. New currency is liquidating debt or being stuffed into mattresses. Creating new credit is pushing a rope to no avail; it too is being used to pay down debt in a lather-rinse-repeat cycle of deflation.

We've a long way to go before inflation rears its ugly head again. Look to Japan for clues... two decades and counting.

Jul 21 05:21 PM

[437339:]

puravidvid,

Gold does really well during periods of extreme deflation, as nothing elso holds any value

Jul 21 05:45 PM

[nobby73:]

Bernanke cannot solve the Triffin dilemma. What he needs to do for the sake of the currency will harm the US economy, what is needed for the sake of the economy will harm the currency. This is why he thinks independence is so crucial, he will be forced to make decisions for the sake of the currency which will hurt the economy. This is also why being the reserve currency appears a benefit, as it brings cheap borrowings, but is actually a burden, because if you try and act for self-interest, it blows up in your face if currency flows back into the country, which is the likely outcome if your economy suffers a worse contraction than the global economy.

Does anybody else really want his job?

Jul 21 05:47 PM

[expat in China:]

200 day moving averages!

Most impressive! who so great a man can invert the direction of such a heavy beast, applaud the crises whisperer.

Jul 21 06:31 PM

[awake09:]

It's not called a BULL market for nothing. Investors are going by the slimmest of reasons to buy right now. When the roulette wheel starts to slow, this thing will fall, fast.

Jul 21 09:22 PM

[derryl:]

Yesterday a Seeking Alpha writer suggested The Fed, Treasury, GS and cohorts are trying to reflate a stock bubble to offset the housing bubble collapse. The idea is they want people to feel wealthier so they will borrow, buy and invest and get the economy rolling again. Restart the wealth effect.

In our current macro environment every indicator points to a deflationary spiral, but Bernanke keeps threatening 'inflation'. One safe place for your money in an inflation is in the stock of companies who can raise their prices along with inflation. On the other hand a big trader like GS can profit from swings it engineers in daily market moves, so GS can amaze us with big profits and get us buying financials again. I must say it does look like there's a concerted effort underway to keep the stock markets moving up.

Yesterday somebody else pointed out that even companies showing quarterly profit gains are doing so on greatly diminished gross receipts. Companies are restoring profitability by firing all the help and getting efficient with a skeleton crew. Shrinking companies are seeing their market cap stable or growing, rather than shrinking.

On fundamentals the markets should be down where the economy is, and stay down until somebody shows some reason to expect an economic recovery to take hold. So far all we see is more economic contraction leading to more contraction = a deflationary spiral. But the markets are holding up pretty well and there's plenty of volatility to exploit. So I think Bernanke's threat of 'inflation' as our punishment for allowing the Fed to be audited is just part of this plan to reflate a stock bubble.

Jul 22 12:25 AM

[sheople:]

There are good points in all of the comments and there are not so good points. The bottom line is that we had good, solid factories that were given away. The following boom was kept alive by the feds, cheap interest rates, and speculation. Now that the bubbles are popping, there is no real economy left. There is nothing but the feds printing money to sustain our economy. The economy is "coming back"? Get a life!

Jul 22 07:48 AM

[dcb:]

Lack of understanding in comments. Kill dollar equals inflation regardless of capacity in economy, Considering Marc Faber has gotten just about everything right with this crisis, including when to buy, I'll stick with what he has to say.


On Jul 21 05:21 PM [e-mail] wrote:

> When massive new liquidity is meant to prop-up festering and growing
> insolvency, the last bubble is waving, "Goodbye!"
>
> Hyperinflation may be sacroscant for gold bugs, but it is difficult
> when most of the money supply is credit, not currency. New currency
> is liquidating debt or being stuffed into mattresses. Creating new
> credit is pushing a rope to no avail; it too is being used to pay
> down debt in a lather-rinse-repeat cycle of deflation.
>
> We've a long way to go before inflation rears its ugly head again.
> Look to Japan for clues... two decades and counting.

Jul 22 08:35 AM

[dcb:]

Based on money flows and consumer data last week should have been the retest of the march lows, with the market now able to move up as recession ends. the only reason it didn't go down was clearly manipulation


On Jul 22 12:25 AM derryl wrote:

> Yesterday a Seeking Alpha writer suggested The Fed, Treasury, GS
> and cohorts are trying to reflate a stock bubble to offset the housing
> bubble collapse. The idea is they want people to feel wealthier
> so they will borrow, buy and invest and get the economy rolling again.
> Restart the wealth effect.
>
> In our current macro environment every indicator points to a deflationary
> spiral, but Bernanke keeps threatening 'inflation'. One safe place
> for your money in an inflation is in the stock of companies who can
> raise their prices along with inflation. On the other hand a big
> trader like GS can profit from swings it engineers in daily market
> moves, so GS can amaze us with big profits and get us buying financials
> again. I must say it does look like there's a concerted effort underway
> to keep the stock markets moving up.
>
> Yesterday somebody else pointed out that even companies showing quarterly
> profit gains are doing so on greatly diminished gross receipts.
> Companies are restoring profitability by firing all the help and
> getting efficient with a skeleton crew. Shrinking companies are
> seeing their market cap stable or growing, rather than shrinking.
>
>
> On fundamentals the markets should be down where the economy is,
> and stay down until somebody shows some reason to expect an economic
> recovery to take hold. So far all we see is more economic contraction
> leading to more contraction = a deflationary spiral. But the markets
> are holding up pretty well and there's plenty of volatility to exploit.
> So I think Bernanke's threat of 'inflation' as our punishment for
> allowing the Fed to be audited is just part of this plan to reflate
> a stock bubble.

Jul 22 08:37 AM

[dcb:]

Except like Volker, I believe what is good for the currency is good for the economy. If you define what is good for the economy as what is good for wall street banks then what you say is true.


On Jul 21 05:47 PM nobby73 wrote:

> Bernanke cannot solve the Triffin dilemma. What he needs to do for
> the sake of the currency will harm the US economy, what is needed
> for the sake of the economy will harm the currency. This is why
> he thinks independence is so crucial, he will be forced to make decisions
> for the sake of the currency which will hurt the economy. This is
> also why being the reserve currency appears a benefit, as it brings
> cheap borrowings, but is actually a burden, because if you try and
> act for self-interest, it blows up in your face if currency flows
> back into the country, which is the likely outcome if your economy
> suffers a worse contraction than the global economy.
>
> Does anybody else really want his job?

Jul 22 08:40 AM

[Roman_Fiddler:]

Even if Bernanke's plan works (which I highly doubt), the underlying problems of this mess are still all there, festering away below the surface.
And even if they managed to start a bubble in stocks to compensate the deflation of real estate (which I highly doubt), it's just a surface fix, just buying time.

The problems are systemic. We can't survive forever on speculation and creating money out of thin air.

Jul 22 01:59 PM

[nobby73:]

Doesn't this depend on whether you mean the global economy or the US economy?


On Jul 22 08:40 AM dcb wrote:

> Except like Volker, I believe what is good for the currency is good
> for the economy. If you define what is good for the economy as what
> is good for wall street banks then what you say is true.

Jul 22 06:14 PM

[PissedLiber...:]

I find our current situation very disturbing and the way the government is handling it, is something of a nightmare...

I never realized the situation this country was in until recently, most people would laugh or just ignore the idea of a collapse, but it is looking more inevitable.... so why is no one paying attention?

Im 20yrs old, I know my generation will not get social security or medicare, because it will cease to exist within a few years.

most people in my family and my friends seem to think america will recover. I think most people are aware that our situation will probably get worse before it gets better...

this website is not the only one in which people are expressing fear and concern about America's future... its happening on both sides, both republicans and democrats are disturbed by the current situation.

Everything the government does is preventing the inevitable, so why not just let it happen?

Its like with california , they have temporary fixed the problem. but by next year it will be worse... Is the federal government afraid to admit we're screwed?

Jul 22 06:26 PM

[expat in China:]

So why negative!

Bernanke did exactly what was required and that was to turn the nose dive of the moving averages. including the 200 day triumph!

<200 day moving averages!

Most impressive! who so great a man can invert the direction of such a heavy beast, applaud the crises whisperer.>

Jul 23 09:48 AM