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.

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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

Bernanke’s right about the state of the economy and job creation in the US. Unfortunately, he and the Fed can’t fix it.

But they can damage the economy trying to fix it.

tom on August 31, 2012 at 6:52 PM

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

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

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

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

Increasing the water pressure has little effect when there’s a crimp on the hose.

exdeadhead on September 1, 2012 at 11:52 AM

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