On Wednesday, my friend Calculated Risk wrote a post that many have asked me about. In case you missed it, please see I come to praise Bernanke
Right now I think the Fed is doing an excellent job with monetary policy, and I was very pleased that Bernanke stayed away from specifics on the deficit (not his responsibility).
In Praise of Soviet Central Planning
Bernanke deserves as much praise as Soviet Central planners for being right about something once every 10 years.
After all, the Fed is nothing more than a group of Soviet-style central planners, primarily academic wonks with no real word experience. Those planners (and their supporters) think the Fed can divine where interest rates should be to support dual or triple mandates, when mathematically it’s not even possible to achieve the stated mission (Please see Dual Mandates, the Price of Gold, and Tinfoil Hats for more about Fed mandates).
For decades, all the Fed has done is blow serial bubble after serial bubble with increasing boom-bust amplitude, occasionally (by mathematical necessity) crossing the zero-line where things appear to be relatively normal, at least for a while.
Unfortunately things are not normal. Bernanke has reignited bubbles in the stock market and junk bonds, and commodity speculation.
Bernanke on Fiscal Policy
Calculated Risk praised Bernanke for staying away from specifics on fiscal policy but that does not hold up to scrutiny.
Fox News has the full text of Bernanke’s Remarks to House Budget Committee for those who are interested. Here are a few snips.
In thinking about achieving fiscal sustainability, it is useful to apply the concept of the primary budget deficit, which is the government budget deficit excluding interest payments on the national debt. To stabilize the ratio of federal debt to the GDP — a useful benchmark for assessing fiscal sustainability — the primary budget deficit must be reduced to zero. Under the CBO projection that I noted earlier, the primary budget deficit is expected to be 2 percent of GDP in 2015 and then rise to almost 3 percent of GDP in 2020 and 6 percent of GDP in 2030. These projections provide a gauge of the adjustments that will be necessary to attain fiscal sustainability. To put the budget on a sustainable trajectory, policy actions — either reductions in spending, increases in revenues, or some combination of the two — will have to be taken to eventually close these primary budget gaps.
By definition, the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis. Acting now to develop a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Plans recently put forward by the President’s National Commission on Fiscal Responsibility and Reform and other prominent groups provide useful starting points for a much- needed national conversation. Although these proposals differ on many details, they demonstrate that realistic solutions to our fiscal problems do exist.
Of course, economic growth is affected not only by the levels of taxes and spending, but also by their composition and structure. I hope that, in addressing our long-term fiscal challenges, the Congress and the Administration will undertake reforms to the government’s tax policies and spending priorities that serve not only to reduce the deficit, but also to enhance the long-term growth potential of our economy — for example, by reducing disincentives to work and to save, by encouraging investment in the skills of our workforce as well as new machinery and equipment, by promoting research and development, and by providing necessary public infrastructure. Our nation cannot reasonably expect to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face.
Bernanke Warns of “Rapid and Painful Response to a Looming Fiscal Crisis”
Bernanke has also warned Congress about a “Rapid and Painful Response to a Looming Fiscal Crisis”, a concept I agree with.
Quoting the economist Herbert Stein that “if something cannot go on forever, it will stop,” Bernanke said that the federal government must stabilize its budget. The question, he said, “is whether these adjustment will take place through a … process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether there will be a rapid and painful response to a looming or actual fiscal crisis.”
Rapid and Painful Response to a Looming Fiscal Crisis
I suggest Congress should listen to one of the few things Bernanke has ever said that made any sense. The correct Congressional response is to take Bernanke at his word and not raise the debt ceiling.
Bernanke Talks out of Both Sides of his Mouth at Once
As much as I can praise Bernanke’s concern over a “Rapid and Painful Response to a Looming Fiscal Crisis”, Bernanke is a hypocrite. He does not want Congress to do anything now.
In fact, Bernanke warned Congress not to take fiscal action now. In effect, Bernanke is telling Congress what to do, and when to do it. He even suggested specific actions in regards to corporate income taxes.
Regardless of whether or not you agree with Bernanke, if that is not specifically commenting on fiscal policy, what the hell is it? Chicken soup?
Tomorrow, Tomorrow, I Love You Tomorrow
Keynesian and Monetarist clown never want to do anything “now”. Should by some miracle the recovery pick up steam, they will not want to do anything “then” either, for fear of killing the recovery.
More importantly, the very idea that a group of currency cranks and academic wonks can divine where interest rates should be is complete totalitarian silliness.
One can argue that things would be worse if Bernanke did not act but that is speculation. Had Bernanke not acted, bondholders would not have been bailed out, too big to fail would have bitten the dust and we would have had a chance for someone like Bill Black to come in, remove all the bank boards of directors, and put in sound management.
Instead, we bailed out the banks at taxpayer expense, the “too big to fail” got even bigger, we did not reinstall Glass-Steagall (one piece of regulation I am in favor of), nor did we tackle any fundamental issues that caused the crisis.
Too Soon To Judge
Calculated Risk argues Bernanke made the right decisions the past couple years. If (big if) Bernake did, it is irrelevant. Praising Bernanke now is like praising a doctor for successfully amputating the cancerous leg of a patient after he first amputated the wrong one.
The Fed has made so many mistakes amplified over the years, that some decisions are likely to be correct (or appear to be correct at any particular point in time).
Realistically, we cannot make a determination now as to the success or failure of the Fed’s recent actions. Perhaps we can make a determination 10 or 20 years from now. Even then, there will be debate as to what might have happened had there not been a Fed that bailed out banks at the expense of taxpayers and those on fixed income. (For a discussion of the problems of those on fixed income, please see Hello Ben Bernanke, Meet “Stephanie”)
Ron Paul: QE2 Is a Total Failure
QE2 is a “total failure,” except for those folks who work on Wall Street,” Rep. Paul says. “It hasn’t done anything for Main Street; hasn’t done anything to give us real jobs; hasn’t done anything for people who are losing their houses.”
As for inflation, “I think there’s plenty,” Rep. Paul says, citing “skyrocketing” commodity prices and rising food prices. One problem is the Fed’s reliance on core CPI, which famously excludes food and energy and relies on hedonic adjustments. “They rig that number,” he says. “[Bernanke] looks at government stats that are fudged to reassure him he doesn’t have to do anything.”
“We’re trying to correct the massive problems we had this decade with more” of the same policies, he laments. “He’s supposed to give us full employment and stable prices and we have neither. How did the Fed do?”
Rep. Paul says he’d support stripping the Fed of its dual mandate – full employment and price stability – as others in Congress have discussed. But he doesn’t think it will do much good and continue to push for a full audit of the Fed and some “competition” for the dollar, as you’ll see in part 2 of this interview.
Central Planning Delusion
Ron Paul: “It is delusional to think that one person could know what the money supply should be and interest rates should be, and that you can do total central economic planning through monetary policy is positively baffling. … I would like to get the monopoly power away from this cartel that pretends they know how to run this entire economy.“
I do not agree with Ron Paul about everything. However, those statements are impossible to logically refute. Moreover, theory and practice are the same, as numerous Fed-sponsored bubbles prove.
By the way, please do not make more out of this post than exists. I agree with Calculated Risk on many things, but vehemently disagree with him on the role of the Fed. We talked on the phone an hour before I wrote this, and we agree to disagree.
Mike “Mish” Shedlock
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