Bernanke’s Reappointment and Monetary Policy
While I have not tried even to the slightest extent to hide my opposition to a central bank in this country, I’ll try to be as objective as possible when looking at Bernanke’s history. I believe the best basis for comparison resides in contrasting him against other chairmen of the Fed, including the previous chairmen such as Alan Greenspan and Paul Volcker.
Review of Bernanke
Prior to the financial crisis, I thought Bernanke had been doing an excellent job as far as chairmen go. He was very quick to act with interest rates, but all in all had quite an easy job in administering monetary policy. After the financial crisis, however, I believe Bernanke began to pay off his cronies, that is, other bankers and the banking industry as a whole by scaring the American populace into a $700 billion bailout.
Bernanke’s Biggest Mistakes
The first is championing and headlining the necessity of a $700 billion bailout. While as a Keynesian it is in his economic understanding that you must “stimulate” the economy by artificially inflating GDP with the printing presses, no one can deny the need for true quantifiable change in production not in spending. We need real economic activity. The second mistake, and likely to be the biggest ever blunder, was to drop interest rates so low, to .25% in response to a credit crunch.
What .25% Fed Rates Mean
We must remember that it was 1% fed rates that created and financed both the housing and oil bubble. Before the tech bubble burst, the 1% level was reached only once. A rate as low as 0-.25% is the lowest ever recorded Federal funds rate, and certain to spark inflation as a result of virtually FREE money. When credit is so cheap, the desire to leverage up is even greater. I fully suspect that today’s low rates will incite a bubble never before seen, and do so because of how the Fed and Congress have constrained the free market.
Why Housing and Commodities Won’t Boom
Already we’re seeing a shift to first regulate the housing market by making speculation, namely leveraged speculation, more difficult. Real estate investors are finding it difficult to take advantage of super low rates unless they can prove the ability to pay from revenue derived from other interests. Also, the CTFC has been particularly active in shutting down and shrinking the interest of major players in the futures markets. With such constraints in place, the typical “anti-inflationary” plays are going to be weak, simply because speculators will not be able to participate in these markets to aid in finding an equilibrium price.
A Breakthrough Bubble
By ridding investors of investments in the most anti-inflationary investments, the newly inflated cash is likely to find other outlets. While there are no present bubbles, at least not those that can be identified, the next bubble is sure to be starting soon. I think the bubble will be in stocks, as its one of the few places the money can go that isn’t regulated. At this time you’re also going to see a huge escape from treasuries and fixed income investments. All the money that poured into “safe-haven” investments during the crisis will pour back into stocks, as investors see them as the only way to protect their assets.
more on Bernanke, my view is not as optimistic.
http://joeshareholder.blogspot.com/2009/08/super-ben-saves-world-from-collapse.html
Ben Bernanke is acutely aware of the situation in Japan and the dangers of deflation. Read his textbook, Macroeconomics 6th Edition, or his speech in 2002, Deflation: Making Sure “It” Doesn’t Happen Here. His fears of prolonged financial difficulty and a deflationary episode in the U.S. similar to Japan’s and the Great Depression are well documented. Because the Fed cuts the federal funds rate to fend off recession, as that rate nears zero it can “run out of ammunition” to fight deflationary pressures. Overtime that rate has been cut to .25%, leaving little ammunition left. Since interest rates cannot go below zero, right now the Fed’s leverage to stimulate the economy is minimal. And if the public loses faith in its ability, what is left of its leverage will evaporate and deflationary forces may gain momentum.
Ben Bernanke’s unprecedented action shows foresight into the problem. He appreciates the importance of acting aggressively before signs of deflation set-in. Relying on low interest rates would be a mistake. To maintain its leverage while combating deflation, authorities have to act aggressively before deflation shows its ugly face. In order to preserve the government’s ability to stabilize the economy, confidence in its ability to do so must be maintained. To maintain confidence, the Fed must avoid being cornered into cutting interest rates to zero as Japan did.