Bernanke: Who’s up for a ride on the QE3?
posted at 12:41 pm on August 31, 2012 by Ed Morrissey
Fed chair Ben Bernanke stopped just short of calling for a third round of quantitative easing in a speech this morning, but there isn’t much mystery now as to whether the Fed will intervene. The only question is when:
The Federal Reserve chairman, Ben S. Bernanke, delivered on Friday a detailed and forceful argument for the benefits of new steps to stimulate the economy, reinforcing earlier indications that the Fed is on the verge of action.
Mr. Bernanke said that the Fed’s policies over the last several years have provided significant benefits, but that a clear need remained for the Fed to do more and that, in his judgment, the likely benefits of such actions outweighed the potential costs.
“It is important to achieve further progress, particularly in the labor market,” Mr. Bernanke said in his prepared remarks. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Mr. Bernanke did not announce any new steps in his speech, delivered before an annual monetary policy conference organized by the Federal Reserve Bank of Kansas City. Nor did he offer a timetable, although many analysts expect the Fed to act at the next meeting of its policy-making committee on Sept. 12 and 13.
There aren’t a lot of options outside of a ride on the QE3 for Bernanke. The Fed has continued its “twist” strategy to stimulate the economy, but that hasn’t provided the boost that Bernanke wants. The continuing lack of jobs is an ongoing tragedy that requires action, Bernanke argued:
“The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”
I don’t disagree with that. The ongoing high levels of unemployment and underemployment risk creating a generation without enough accrued wealth to survive without significant assistance past their working years, which will necessarily have to be extended. That will keep younger people of those generations from gaining ground in the job market and accruing capital, and it will be a vicious cycle unless we can start creating jobs now — and good-paying jobs rather than McJobs.
The question, though, is whether a QE3 will produce that kind of outcome, even though it’s the only tool Bernanke has. So far, QE1 and QE2 haven’t, and that’s because the problem isn’t a tight money supply. Money is about as cheap as it ever has been. Diluting its value might prompt a few to put capital in play earlier, but again, that hasn’t been the case with the Fed’s earlier interventions, at least not to the extent to solve the problem or even significantly alleviate it. The reason why “the economic situation is obviously far from satisfactory” is because of the policies of Barack Obama on regulation, especially the sweeping and still-ambiguous powers granted under ObamaCare and Dodd-Frank. If businesses cannot price risk, they will not invest in growth-producing activities.
Bernanke’s right about the state of the economy and job creation in the US. Unfortunately, he and the Fed can’t fix it.
Related Posts:
Blowback
Note from Hot Air management: This section is for comments from Hot Air's community of registered readers. Please don't assume that Hot Air management agrees with or otherwise endorses any particular comment just because we let it stand. A reminder: Anyone who fails to comply with our terms of use may lose their posting privilege.
Trackbacks/Pings
Trackback URL
Comments
Comment pages: « Previous 1 2
Wrong. There’s nothing easy about trying to argue that “food stamps to the poor will be just the stimulus we need to lift our country into greater prosperity.”
That’s a stupid argument.
No, it doesn’t.
I think the well-meaningness of the Democrats is immaterial. The best intentions in the world don’t make-up for the flaws of their stupidity about fiscal policies.
That being said, I don’t know where Bernanke falls on that spectrum. He was wrong and stupid for providing Democrats cover over this issue, but I don’t know if that was based on his desire to appear politically neutral or his tax/spend philosophies.
Obviously, Bernanke has no problem using QE as a tool, but I’m hoping that you know that QE and stimulus spending are different animals.
This makes me think that you don’t realize that QE and stimulus spending are different. I think I need to educate you about monetary policy issues so that you can understand the difference.
blink on August 31, 2012 at 5:41 PM
The QE’s didn’t fail. They did exactly what they were expected to do – stabilize the economy despite the fact that Obama’s policies would otherwise have it in a nosedive.
No, that’s not how inflation is defined. Inflation is defined as the rate at which consumer prices are rising.
This statement is strange. I know plenty of people that have purchased houses, cars, and other material goods and services via bank debt. If default rates are managed properly, then this isn’t unprofitable business.
I’ve been hearing about runaway inflation for years now, and it hasn’t happened yet. It could most certainly start at any time, but this is what Bernanke is weighing. That being said, it doesn’t make sense to avoid benefits of QE simply to push the risk of inflation down to zero.
blink on August 31, 2012 at 5:49 PM
An increase in the money supply without a corresponding increase in productivity/output causes an increase in prices, i.e. inflation.
RedCrow on August 31, 2012 at 6:38 PM
But they can damage the economy trying to fix it.
tom on August 31, 2012 at 6:52 PM
Yes, unless the QE is simply propping up an otherwise declining economy. The QE can merely offset deflationary pressures of a declining economy.
blink on August 31, 2012 at 6:54 PM
Blink,
I got to say, you seem to be a little lost when it comes to big money matters.
They have not stabilized the economy where Obama would have it nosedive. What they have done is put off until tomorrow would would be less difficult today.
My wife does this frequently. She puts off doing dishes or cleaning up food spills from the baby for days. When she finally gets to it, I end up doing them, because the food is dried and hard to scrub off. If she would have done it the day the dishes were dirtied, it would take 15 minutes. It takes much longer later. But while the dishes are dirty she decides not to make more, so she pushes me to take her out to eat. But she does not want to hit a fast food joint, but a nice sit down dinner place. So now we are out not just the time to do harder to clean dishes, but the money to work around doing what should have just been done in the first place right away.
Here is how it works out in the real world. You may have heard this story…
A president comes into office at a time when the economy is doing OK, but it hits a small snag. One bright point of the economy is housing, which is being propped up by government changes in the banking rules. The increase in wealth is ephemeral, and not going to remain, but as president, you like to be told how awesome your economy is, so you put off fixing the problem for a couple years, lets say from 2002 to like, I dunno 2008. Now, all this fake wealth is being spent by the truckload, often for trucks, the SUV type and like water, the kind you find on vacation in Hawaii. But the fake wealth finally catches up with the country and we hit a HUGE nosedive. How could this have been avoided? Well, reform of Fannie and Freddie would have worked wonders, in 2002, when the amount of fake wealth sitting around waiting to dissipate was relatively small. But when it happened in 2008, it was an order of magnitude greater.
So, what does this have to do with QE? Well, what the government is doing here is the same as with the housing market. They are artificially depressing the economy, artificially propping up the banking system which is living off fake wealth creation and artificially lowering the interest rates that a free market would command. If you are a bank, you can buy US bonds cheap, and then sell them back to the fed for a quick turn around profit. Don’t see a problem with this? Well for one, it takes money that would be loaned out to businesses and turns it over to the government depressing the economy, it pushes the interests rates down, as it is a circle jerk of massive reach around proportions where the money is just flowing from the government to the banks and back again creating no wealth but pumping out extraordinary amounts of dollar bills for the cronies and their friends, and allowing the nation to borrow far more money than it would ordinarily be capable of borrowing in the time frame in which it is being borrowed. This works great if you keep the economy in the dumps forever and do not care if you have trade partners three years from now. It is not so great when the economy starts to rebound. All this fake wealth in the system is going to drive prices higher. So, do we cut off the bubble now, or do we keep putting off til the future when the consequences will be a magnitude or more larger than they are today?
I think I know what Romney will decide. He will do the same thing Bush did in 2002 and 2003. Put it off til it destroys the economy. Cannot make the corrections during Romney’s time in office, he might not get reelected in 2016 for god’s sake, and it is his right to 8 years in office. You can see this in the Romney/Ryan plans. No cuts at all in the first 4 years, actually first 20 years. All the real hard to make decisions, well, those are for another day perhaps. All we can do is make you imagine we changed the direction of this train wreck and hope you are all way too stupid to notice.
astonerii on August 31, 2012 at 7:11 PM
Hilarious. I’m incredibly astute about financial, microeconomics, and macroeconomic matters.
Yes, he did. The economy has not contracted at all since early 2009. That’s amazing given the socialist policies, etc. of the Obama administration.
No, not LESS difficult. With respect to monetary supply, it’s easier to save an economy and then re-adjust after you get the economy growing again, than it is to allow the economy to nosedive today.
You’re dead wrong about that.
This is a bad analogy. A better analogy is fitness. It’s better to keep yourself in shape somehow until you can get yourself back to your regular training program. This is better than letting yourself get out of shape, and then trying to fix it later.
You are obviously confusing many different issues. But yes, monetary supply should be contracted during good years. Putting it off during good years is bad monetary policy.
Monetary expansion isn’t used to create fake wealthy. Monetary contraction was occurring during the housing bubble. I personally argued that the contraction should have been more aggressive, and I definitely argued that it should have been more aggressive during the internet bubble (but that was too difficult for the Greenspan types to see because it was an equity fueled bubble).
But here’s the deal, monetary contraction WAS being used and prevented the bubble issue from getting worse than it did. Then, monetary expansion helped soften the landing. If a Romney presidency (or the expectation of a Romney presidency) can rally the economy, then I think the Fed should be aggressive about contracting.
That’s how it works.
Fannie and Freddie are a mess that needs to be reformed. No argument from me there.
What are you talking about? 2002 was in the middle of the economic trough, there was no need to dissipate wealth at that time.
No, it’s not the same. Your conflation of all these different (yet related) issues makes you unable to discuss this properly.
QE’s have NOT artificially depressed the economy. You’re off 180 degrees on this. Liberal budget/fiscal policies have hurt the economy.
Again, why do you think that these are the exact same thing? They are interrelated, but different things.
Wait, which is it? Is there too much currency or not enough? This phrase proves that you don’t know what you’re talking about. You’re all over the place.
No, it won’t. Not if monetary contraction is executed when the economy starts to rebound.
Well, if by “bubble” you mean the monetary supply, then the answer is NO. We keep the monetary supply expanded until the economy starts to rebound. Then you contract it.
There doesn’t need to be any consequences at all if the contraction occurs on time and is aggressive enough.
Put what off? Bush did not have control of the money supply nor will Romney. This is how the fed was structures so many years ago.
Again, it’s obvious that you don’t know what you’re talking about.
1. Obviously, you’ve switched from talking about monetary policy to the budget. Did you even realize that you made this switch?
2. Your claims aren’t true.
3. Preventing spending growth while growing the economy reduces budget deficits quite effectively.
This is ironic from someone that doesn’t understand the underlying issues.
blink on August 31, 2012 at 7:56 PM
The progressives got nothing on you when it comes to economic matters. You are a big active government person. Romney will fit you just fine. But he will not ease back when the economy gets going. That is the crux of the matter. Just like Bush did not. He want to be seen as a success. In fact he has probably already made the determination to inflate his way out of the problem.
astonerii on August 31, 2012 at 8:14 PM
Which was the reason for Carter’s success. Oh….yeah.
The problem is while the economists and financial wizards pore over their spreadsheets and actuarial data, watching for the inflationary forces to begin so that they can be controlled, they completely ignore the effect of inflation on the core of the economy..the people.
People don’t generally like it when they go broke because the government has decided to save itself at the cost of the people.
This was what Reagan understood. QE, deficit spending, budget cuts, stimulus, Fannie Mae, etc…all of these things artificially control the market so that it behaves in a way the government wants it to behave. The analogy here is like attempting to stay awake forever. After a day or two, you need help…caffeine, amphetamines, whatever. While you may feel like you’re achieving your goal, you are causing damage to your body by introducing stimulants which may be irreparable. And sooner or later, you will fall asleep. Then, if you’re not a politician or a socialist, you’ll learn that the whole idea of screwing with the natural flow was pretty stupid to begin with. We learned this from Reagan. But too many people have forgotten it.
Just imagine a mortgage at 18% interest. 32 years ago, that’s what they were.
BobMbx on August 31, 2012 at 8:57 PM
No, I’m not. You’re drawing that conclusion out of your own ignorance. There’s nothing big government about a government currency, and there’s nothing big government about the concept of a monetary supply manager – much like what we have in place right now.
I’m all ears if you have a better system to recommend. Do you want to abolish the dollar? Do you want to limit the aggregate value of dollars to the gold that we have in inventory? Do you want to limit the aggregate value of dollars to a multiple of the gold that we have in inventory? What? What do you want? Are you ok with expanding the currency at the rate of GDP? Do you want to outlaw all supply and contraction efforts (even small ones)?
Tell me the system that you have in mind.
Apparently, you think the President has executive control of the monetary system. Why are you even bothering to wade into this debate?
Look, I’ve tried to respect your opinion regarding Romney not being conservative enough for you, but it’s become obvious that you don’t know what you’re talking about with respect to monetary supply management and the federal government’s budget so it’s difficult to have a normal conversation with you about it.
blink on August 31, 2012 at 9:10 PM
??? Are you seriously claiming that Carter wouldn’t have immediately curtailed inflation if he had had any ability to do so?
Runaway inflation was making him look terrible. The US didn’t have a huge debt problem at the time so it’s double silly that you’re claiming that Carter was trying to cause inflation. It’s triple silly for you to claim that he had some inflation lever that he was pulling.
Your statement is incredibly puzzling. Your acknowledging that economists (I suppose you mean the economists that advise voting fed members) are watching for inflation so that they can respond with controlling measures, but then you claim that they ignore the effect on the economy? Why would they attempt to control it if they were ignoring the economic effects?
What do you mean by government saving itself? QE props up an economy during lean economic times. That spares the American people having to suffer from a worse economy – not just government people. Again, it’s a tradeoff and it’s risk management that the fed must constantly weigh.
Again, it doesn’t make sense to constrain an economy merely to assure yourself zero risk of inflation. Additionally, it doesn’t make sense to allow runaway inflation merely to prevent economic anemia. The fed has the job of balancing these benefits/cost/risks.
Let’s go with a version of this analogy. First, nobody is claiming that QE can be used “forever.” Reread my posts, I’ve clearly used the term temporary expansion and contractions.
Using caffeine or other stimulant to stay awake for several extra hours when you need a boost can help you be more efficient in your life (especially with a demand job or as a student). Obviously, this needs to be balanced with a resting period that allows you to get extra sleep and taper off on your stimulant. Obviously, the fact that stimulants can be abused is no reason to outlaw them.
So, this is my analogy with monetary expansion/contraction.
Now, budget deficient spending is a completely different matter. Our system of elected officials have already proven itself to be incapable of tapering off on federal budget deficits ever. Let’s liken this to alcohol abuse. We are an addict that needs an intervention to get off and stay off alcohol.
But for the love of Christopher, stop confusing federal reserve monetary expansion with federal government budget deficits.
I hate to break this to you, but Reagan’s initial budget deficit increased quite a bit. Some of our recovery during Reagan was related to the defense industry and technology spinoffs from there.
I’m not faulting Reagan for it, we were in the middle of the cold war and Carter left us weak. In the end, the peace dividend should have been huge. But unfortunately, Bush senior had a liberal congress and was too weak to allow a government shutdown.
Yes, that was REAL inflation. People have been warning about this type of inflation since 2008. It hasn’t happened yet. Their prediction skills sucked because they lacked a proper understanding of macroeconomics.
blink on August 31, 2012 at 9:34 PM
Binky, you’re at it again!!! I admire your enthusiasm in wanting to participate, BUT:
Better to sit on your hands or study some authoritative reference material and tutorials than to continue posting proof you don’t understand the basics of economics.
When money is worth less, does it buy more or less?
If your money buys less, do you consequently experience inflation or deflation?
landlines on September 1, 2012 at 12:03 AM
I want to address this, too. Devaluations can happen for many reasons – including a nosediving economy. Stop pretending that devaluations are only a product of QE.
blink on September 1, 2012 at 12:04 AM
I’ve made it obvious that I understand exactly what I’m talking about.
I have equally meaningful questions for you.
Does the color red appear to be red or blue?
If you have a red flower, does the flower seem red or blue?
Now, inflation/deflation is measured by the rate at which a currency’s purchasing power decreases/increases. It is NOT measured as a function of a currency’s dilution – which you seem to believe for some strange reason. In fact, it’s quite possible to have deflation while simultaneously expanding the money supply.
People like you seem to believe that the dollar would have much greater purchasing power if no easings had occurred. 1. This is not necessarily true. 2. Even if it was true, many people end up with fewer dollars when an economy nosedives so their overall purchasing power is diminished by a much greater amount.
Again, please tell me what system you prefer. Would you prefer the gold standard? Would you prefer never expanding the money supply regardless of economic growth.
I’m terribly sorry that this issue is a bit complicated and difficult for you to understand, but the real world often is.
blink on September 1, 2012 at 11:22 AM
Increasing the water pressure has little effect when there’s a crimp on the hose.
exdeadhead on September 1, 2012 at 11:52 AM
Good analogy. Obama has crimped the hose, and the only thing that has maintained the water flow is the increased pressure from QE. That pressure can easily be reduced when a President Romney takes over so that the flow doesn’t get out of control.
blink on September 1, 2012 at 12:26 PM
Comment pages: « Previous 1 2