Category Archives: Ben Bernanke

Don’t Politicize The Fed

If all you were focusing on was Congress’ reaction to the Federal Reserve’s actions since the financial crisis, you might ask yourself “why is everyone worried about partisanship?” Heavy players on the left and right have wanted the Fed to be more transparent, open up its books, and do more to fix the economy. While Republican Presidential Candidate Ron Paul has advocated for getting rid of the agency altogether, Congressman Barney Frank, ranking member of the Financial Services Committee, recently introduced legislation that would make the agency succumb to political friction.

It is the Fed’s job to keep an eye on the economy and make sure employment is high. That meant giving hundreds of billions of dollars to banks so they were able to keep lending money, and then giving them even more money when the entire financial system collapsed. All the bad loans banks made were, and still are, on the books of the Fed. That means (since the Fed runs on taxpayer money) American’s own all the bad bets banks made and now have to figure out a way to pay it back.

But if the economy does get going again the Fed would be able to pay those bets back. They have held interest rates at zero which is supposed to increase lending, and they found a way to give them more money with a policy called quantitative easing (QE), which they used not once but twice. While people disagree QE’s effectiveness most agree it helped to a certain extent because it gave banks more wiggle room. But banks are still afraid to lend and businesses are afraid to spend. But is this the Fed’s fault? Many analysts blame this economic quagmire on Congress because businesses leaders are unable to predict what will happen in the long or short term.

But Congress’ hands are tied as well. With every spending bill being seen as some sort of brinkmanship it has become increasingly harder to get any type of legislation passed. So instead of Congress doing something, Frank believes the Fed should have the power to do more. His legislation will have the Governors, which make up the Fed’s board, an elected position. This would replace the current system of the President nominating the Governors and the Senate having to approve them. In theory, this would make them accountable to the people and if the economy did not get better to their satisfaction they could elect new Governors. It would give them more influence because they can say the power of “the people” is behind them.

Frank is one of the leading voices in Congress when it comes to banking, but it seems he forgot that the Fed was not supposed to be made part of the political arena. Some things go beyond politics and the economy is definitely one of them. Those deciding how much the banks should have to keep in their reserve funds and what interest rates should be have an enormous effect on the types of economies we will be living in. These decisions are big enough to worry about, especially in these times that being reelected should be the last thing people making them should be thinking about. Besides, where else are we going to hear someone say it is American consumer’s fault the economy is still not getting better?

I also have to wonder what makes Frank think that people would want to run for these positions. While there are supposed to be 7 Governors on the board, the President has not been able to find 2 others who want the job. That’s either because the confirmation by the Senate would be too much for them, or they are asking themselves why they would want to get involved in trying to solve this mess? It should not come as a surprise that most of Obama’s economic team left after just two years. This is not a fun situation to be dealing with, no matter where you are sitting.



Filed under Ben Bernanke, Economics

Information Is Power

As a policy wonk, I was excited to see Ben Bernanke’s press conference, the first ever at the Federal Reserve. I know there aren’t a lot of us out there, but in a time where people are uncertain it is important to hear from the leaders who are supposed to be looking out for our best interests. I wrote a column for Government In The Lab about how these conferences came to form. Now, it wasn’t as entertaining as Donald Trump, but more importantly it wasn’t stupid.

While many people on Wall Street are very good at math, I kinda doubt many of them were history majors. After the Civil War, recessions were a pretty common occurrence and it hurt a lot of businesses around the country. The turn of the century was a time where the dollar was just starting to go into circulation, which meant when there was a slowdown in the north it affected the south and vice versa. But there was no Standard and Poors or Moody’s coming out with information where people can get a picture of what was happening. To stop these blips in the economy, President Woodrow Wilson signed the Federal Reserve Act in 1912. The central bank had two mandates which still drive its policy decisions today: 1) control America’s monetary policy and 2) create jobs.

Whatever Ben Bernanke said at the conference is on the record and can be held accountable too. For instance, one of the bigger items mentioned was the Quantitative Easing (QE) policy being implemented, and there is controversy over how effective it has been. Basically, the Fed is buying back the mortgages the banks sold before the recession thinking the housing bubble wouldn’t burst. The Fed claims this has allowed banks to clean their books giving them the ability to loan each other, small businesses, and individual’s money to keep the economy moving. The Fed claims this has worked because there has been growth since it has started. But critics point to the fact banks have not been lending a lot of money, the economy hasn’t grown all that much (GDP grew only 1.8% the first quarter of 2011), and job numbers are still at an all time low.

Bernanke is just like any other person in charge of a big institution, at certain times they need to cover their own behind. If it doesn’t seem like he knows what he’s talking about, or the facts don’t back up what he’s saying, he will lose legitimacy and trust. While addressing reporters’ questions yesterday, Bernanke said this about the steps the Fed, under his tenure, have done to help the economy recover:

I do believe that the second round of securities purchases was effective. We saw that first in the financial markets. The way monetary policy always works is by easing financial conditions, and we saw increases in stock prices. We saw reduced spreads in credit markets. We saw reduced volatility.

On certain parts there isn’t a lot of debate. The market is less volatile; we see this as the stock market has gone up, banks are no longer in need of extra money, and most companies are reporting strong profits this quarter. All good signs. So sure, it seems unlikely there will be another recession, but what about the jobs?

When one reporter asked about why there hasn’t been strong job growth all Bernanke could say is:

the pace of improvement is still quite slow and we are digging ourselves out of a very, very deep hole. We are still something like 7 million plus jobs below where we were before the crisis. So clearly, the fact that we are moving in the right direction even though that’s encouraging doesn’t mean that the labor market is in good shape. Obviously it’s not, we are going to have to continue to watch and hope that we will get stronger, increasingly strong job creation going forward.

Now if the reporter had the chance to follow up, he could have pointed out the unemployment number is actually around 11 or 12 million people. But this was Bernanke’s weakest point during the press conference. The person in charge of creating jobs in this country is “hoping” that the economy will pick up enough so more jobs can be created. Well, I feel more confidant, don’t you?

The money the Federal Reserve decides to spend, or not spend, has an effect on all of us. It controls our purchasing power affecting small businesses and their ability to sell their products abroad, and individuals who are having to choose between buying food and health insurance. But now that Bernanke has made these statements, at the next press conference reporters can ask him (after he has spent $600 billion helping the banks recover) why the economy still hasn’t picked up as much as he thought it would?

Bernanke did not just become Chairman on a whim. He was an economist at Princeton and his academic writings were very impressive. But even the best economists screw up. Bernanke was on the Board of Federal Reserve while there were signs the economy was declining. And even though the Fed was fully implemented in 1913, look up what happened on October 29th 1929. You can always find economists disagreeing with each other, like they did before and during the Great Depression. But now we can ask the person in charge what he/she thinks, which goes a long way to making sure the Fed is implementing the right policies, and will help businesses and families plan for their future.

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Filed under Banks, Ben Bernanke, Economics, Federal Reserve, Monetary Policy, Press Conference, Quantitative Easing