Reading (And Partially Defending) Mr. Bernanke

by: John M. Mason

There has been a lot of criticism of Ben Bernanke and the Fed's new QE3 move as a last ditch effort to save President Obama.

I don't agree with this assessment.

I believe that Mr. Bernanke had been trying very hard to avoid a Federal Reserve move before the November election.

For one thing, such a move, I believe would produce very little in the way of an improved economy before the election. There is the stock market bounce…which, in the short run, might improve attitudes…but, I believe that this bounce will not be sustained.

Second, Mr. Bernanke was aware that any Federal Reserve move before the election would be jumped on as a move to "save" the President. I believe that he tried as hard as he could to avoid having the Federal Reserve take any action before the election. He knew he would be in of an enormous amount of criticism if he made such a move.

Third, this move puts the Fed in danger because there are people in Congress who would love to put tighter reins on the Federal Reserve…or even eliminate it. This action just gives those people in Congress a "green light" to go ahead with even more serious attacks on the Fed's credibility.

In his speech at Jackson Hole, Wyoming, and in earlier comments in August or before, Mr. Bernanke stated that the Federal Reserve did not want to do anything more in the way of monetary ease but, that he and others at the Fed would keep their eyes open for the need to do something more to the economy.

I really believe that Bernanke did not want to step on the gas before the election. I believe that he really knew the problems such a move would produce.

This makes me all the more concerned about the fact that the Federal Reserve did initiate QE3 less than 60 days before the election. The economy must be doing worse than we think. On this see my post "Mr. Bernanke and the 'economic cliff."

I have written over and over during the last three years that Mr. Bernanke, the economic historian of the Great Depression, was worried about two things. The first was the initial financial collapse, itself. He responded to the initial collapse in 2008 with QE1. The lesson he had drawn from his earlier studies was that the central bank should respond to a major financial collapse with massive injections of high-powered money (the Monetary Base) into the economy.

He and the Fed injected massive amounts of high-powered money into the economy!

The second thing Mr. Bernanke has worried about has been a 1937-like depression. I believe that this was part of the justification for QE2. The banking system in late 2010 was still facing substantial solvency problems. The Federal Reserve created a second round of quantitative easing so that the FDIC would have the most favorable conditions possible to smoothly close banks or assist in merging troubled banks into healthy banks. This transition has been and still is going on about as well as it could.

I still believe that the fear of facing a "1937-like depression" lingers in Bernanke's mind. The data released last week, in my mind, played a big part in convincing Mr. Bernanke that action needed to be taken before the election.

This action comes three years after the current economic recovery began in July 2009. Note that the 1937-38 depression began four years after the Great Depression ended in 1933.

In fact, I think that the most important thing to take away from the Fed's action is that the data were bad enough to warrant Mr. Bernanke and the Fed taking the risk they did by entering into QE3.

Given all the abuse that Mr. Bernanke and other members of the Open Market Committee knew that they would have to absorb if they did initiate QE3, the information they reviewed must have been bad enough for them to act before the election and take the criticism they knew would be coming.

Readers of this blog know that I am not a fan of Mr. Bernanke and was not in favor of his re-appointment. If you read the blogpost mentioned above, you will understand that I am not real excited about QE3, nor do I believe that it will do much good.

My reading of what Mr. Bernanke and the Fed have done is that the economy is worse off than I have believed it to be. I cannot justify them taking the action they did for any other reason.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.