The Wholly Fallible Ben Bernanke
Many have noted the resemblance between the Federal Reserve Board and
the Catholic church. Both have long traditions of secret convocations:
meetings of the open market committee and the College of Cardinals. Both
have a revered leader: the chairman of the board of governors and the
pope. And both have claims to infallibility.
OK, it is only the
pope who can explicitly claim infallibility. In the case of the Fed
chair, infallibility is bestowed by the business reporters and
politicians who treat every word from the reigning Fed chair as a
priceless pearl of wisdom.
This aura of infallibility is
especially painful in the current economic situation when error seems to
be the new religion of the Fed. Just to remind everyone - since so much
denial has dominated the debate - the only reason that we are facing
near double-digit unemployment and the worst economic calamity in 70
years is that the Fed was out to lunch in combating the housing bubble.
The
Fed was apparently unable to recognise a massive and unexplained
departure from a 100-year long trend in the largest market in the world
as a bubble. Even after it had just seen the stock bubble grow and
implode it still could not conceive of a bubble in the housing market. Ben Bernanke,
chairman of the Fed, and other spokespeople for the body have also
claimed there was nothing they could have done even if they did
recognise the bubble.
Call this colossal error No 1. This is
drunkenly driving the school bus into the lane of oncoming traffic,
killing all aboard. In most lines of work, you would be fired
immediately and barred from ever working again. For the Fed chairman
this is just a bad break.
Having missed the largest financial
bubble in the history of the world, Bernanke quickly moved to colossal
error No 2, failing to take adequate steps to counteract the downturn.
While Bernanke deserves credit for being more aggressive than some of
the quacks who would have just let the financial system melt down
completely, his response to mass unemployment has been woefully
inadequate.
The Fed should be targeting a higher rate of
inflation, in the 3-4% range. This would reduce real interest rates and
debt burdens. What is the downside in this picture; inflation
accelerates too much and hits 5-6%? How does that compare with years of
excessive unemployment, with millions of people unemployed or
underemployed needlessly? No reasonable calculation of costs and risks
would justify Bernanke's timidity in the current circumstances.
Bernanke's
third colossal error is playing along with the deficit fervour being
promoted by those seeking to gut social security, Medicare and other
areas of social spending. The downturn has predictably led to an
explosion of the deficit, as public spending had to fill the gap created
by the collapse of private spending.
However there is no reason
whatsoever why this deficit should place any burden on the long-term
federal budget. A responsible Fed chairman would announce his intention
to simply buy and hold the government debt used to finance the deficit.
This would prevent the debt from placing any future burden on the public
budget since the interest payments on the debt would go to the Fed. The
Fed would in turn refund the interest to the Treasury each year,
leaving no net interest burden on the government.
Japan's central
bank currently holds an amount of public debt that is almost equal to
its GDP ($14.5 trillion in the case of the United States). As a result,
Japan's interest burden is less than that of the US even though its
ratio of debt to GDP is 220%, almost four times the ratio in the US.
If
Bernanke was honestly doing his job he would be educating the public
about why debt run up to counteract a downturn need not impose a burden
on the budget. Instead, he is running around telling Congress to cut
social security because "that's where the money is".
The country
is paying an enormous cost for Bernanke's three errors. In any other
line of work any one of these errors would be huge enough to have
someone drummed out of the profession. But the Fed has more in common
with the Catholic church than it does with normal institutions. As a
result, Pope Bernanke is really messing up big time, yet he is still
being allowed to wear the mantle of infallibility and the rest of us are
being forced to suffer the consequences.
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Many have noted the resemblance between the Federal Reserve Board and
the Catholic church. Both have long traditions of secret convocations:
meetings of the open market committee and the College of Cardinals. Both
have a revered leader: the chairman of the board of governors and the
pope. And both have claims to infallibility.
OK, it is only the
pope who can explicitly claim infallibility. In the case of the Fed
chair, infallibility is bestowed by the business reporters and
politicians who treat every word from the reigning Fed chair as a
priceless pearl of wisdom.
This aura of infallibility is
especially painful in the current economic situation when error seems to
be the new religion of the Fed. Just to remind everyone - since so much
denial has dominated the debate - the only reason that we are facing
near double-digit unemployment and the worst economic calamity in 70
years is that the Fed was out to lunch in combating the housing bubble.
The
Fed was apparently unable to recognise a massive and unexplained
departure from a 100-year long trend in the largest market in the world
as a bubble. Even after it had just seen the stock bubble grow and
implode it still could not conceive of a bubble in the housing market. Ben Bernanke,
chairman of the Fed, and other spokespeople for the body have also
claimed there was nothing they could have done even if they did
recognise the bubble.
Call this colossal error No 1. This is
drunkenly driving the school bus into the lane of oncoming traffic,
killing all aboard. In most lines of work, you would be fired
immediately and barred from ever working again. For the Fed chairman
this is just a bad break.
Having missed the largest financial
bubble in the history of the world, Bernanke quickly moved to colossal
error No 2, failing to take adequate steps to counteract the downturn.
While Bernanke deserves credit for being more aggressive than some of
the quacks who would have just let the financial system melt down
completely, his response to mass unemployment has been woefully
inadequate.
The Fed should be targeting a higher rate of
inflation, in the 3-4% range. This would reduce real interest rates and
debt burdens. What is the downside in this picture; inflation
accelerates too much and hits 5-6%? How does that compare with years of
excessive unemployment, with millions of people unemployed or
underemployed needlessly? No reasonable calculation of costs and risks
would justify Bernanke's timidity in the current circumstances.
Bernanke's
third colossal error is playing along with the deficit fervour being
promoted by those seeking to gut social security, Medicare and other
areas of social spending. The downturn has predictably led to an
explosion of the deficit, as public spending had to fill the gap created
by the collapse of private spending.
However there is no reason
whatsoever why this deficit should place any burden on the long-term
federal budget. A responsible Fed chairman would announce his intention
to simply buy and hold the government debt used to finance the deficit.
This would prevent the debt from placing any future burden on the public
budget since the interest payments on the debt would go to the Fed. The
Fed would in turn refund the interest to the Treasury each year,
leaving no net interest burden on the government.
Japan's central
bank currently holds an amount of public debt that is almost equal to
its GDP ($14.5 trillion in the case of the United States). As a result,
Japan's interest burden is less than that of the US even though its
ratio of debt to GDP is 220%, almost four times the ratio in the US.
If
Bernanke was honestly doing his job he would be educating the public
about why debt run up to counteract a downturn need not impose a burden
on the budget. Instead, he is running around telling Congress to cut
social security because "that's where the money is".
The country
is paying an enormous cost for Bernanke's three errors. In any other
line of work any one of these errors would be huge enough to have
someone drummed out of the profession. But the Fed has more in common
with the Catholic church than it does with normal institutions. As a
result, Pope Bernanke is really messing up big time, yet he is still
being allowed to wear the mantle of infallibility and the rest of us are
being forced to suffer the consequences.
Many have noted the resemblance between the Federal Reserve Board and
the Catholic church. Both have long traditions of secret convocations:
meetings of the open market committee and the College of Cardinals. Both
have a revered leader: the chairman of the board of governors and the
pope. And both have claims to infallibility.
OK, it is only the
pope who can explicitly claim infallibility. In the case of the Fed
chair, infallibility is bestowed by the business reporters and
politicians who treat every word from the reigning Fed chair as a
priceless pearl of wisdom.
This aura of infallibility is
especially painful in the current economic situation when error seems to
be the new religion of the Fed. Just to remind everyone - since so much
denial has dominated the debate - the only reason that we are facing
near double-digit unemployment and the worst economic calamity in 70
years is that the Fed was out to lunch in combating the housing bubble.
The
Fed was apparently unable to recognise a massive and unexplained
departure from a 100-year long trend in the largest market in the world
as a bubble. Even after it had just seen the stock bubble grow and
implode it still could not conceive of a bubble in the housing market. Ben Bernanke,
chairman of the Fed, and other spokespeople for the body have also
claimed there was nothing they could have done even if they did
recognise the bubble.
Call this colossal error No 1. This is
drunkenly driving the school bus into the lane of oncoming traffic,
killing all aboard. In most lines of work, you would be fired
immediately and barred from ever working again. For the Fed chairman
this is just a bad break.
Having missed the largest financial
bubble in the history of the world, Bernanke quickly moved to colossal
error No 2, failing to take adequate steps to counteract the downturn.
While Bernanke deserves credit for being more aggressive than some of
the quacks who would have just let the financial system melt down
completely, his response to mass unemployment has been woefully
inadequate.
The Fed should be targeting a higher rate of
inflation, in the 3-4% range. This would reduce real interest rates and
debt burdens. What is the downside in this picture; inflation
accelerates too much and hits 5-6%? How does that compare with years of
excessive unemployment, with millions of people unemployed or
underemployed needlessly? No reasonable calculation of costs and risks
would justify Bernanke's timidity in the current circumstances.
Bernanke's
third colossal error is playing along with the deficit fervour being
promoted by those seeking to gut social security, Medicare and other
areas of social spending. The downturn has predictably led to an
explosion of the deficit, as public spending had to fill the gap created
by the collapse of private spending.
However there is no reason
whatsoever why this deficit should place any burden on the long-term
federal budget. A responsible Fed chairman would announce his intention
to simply buy and hold the government debt used to finance the deficit.
This would prevent the debt from placing any future burden on the public
budget since the interest payments on the debt would go to the Fed. The
Fed would in turn refund the interest to the Treasury each year,
leaving no net interest burden on the government.
Japan's central
bank currently holds an amount of public debt that is almost equal to
its GDP ($14.5 trillion in the case of the United States). As a result,
Japan's interest burden is less than that of the US even though its
ratio of debt to GDP is 220%, almost four times the ratio in the US.
If
Bernanke was honestly doing his job he would be educating the public
about why debt run up to counteract a downturn need not impose a burden
on the budget. Instead, he is running around telling Congress to cut
social security because "that's where the money is".
The country
is paying an enormous cost for Bernanke's three errors. In any other
line of work any one of these errors would be huge enough to have
someone drummed out of the profession. But the Fed has more in common
with the Catholic church than it does with normal institutions. As a
result, Pope Bernanke is really messing up big time, yet he is still
being allowed to wear the mantle of infallibility and the rest of us are
being forced to suffer the consequences.