5 Questions for Ben Bernanke

by Dan Burrows | October 1, 2012 12:59 pm

As soon as the Federal Reserve launched a third round of quantitative easing intended to boost the economy, wags started lampooning QE3 as “Buzz Lightyear” easing, because it goes to infinity and beyond.

QE, or quantitative easing, is the when the Fed buys up debt securities with newly minted money[1]. It’s supposed to keep interest rates low at the long end of the yield curve, thus spurring borrowing and spending — as well as forcing investors into riskier (and supposedly more productive) assets.

It’s a policy that has always been controversial[2], especially as it pertains to unintended consequences. Massively inflating the Fed’s balance sheet is crushing savers today and has the potential to unleash rampant inflation in the future[3].

There’s also the concern that QE is causing artificially high stock prices. Indeed, Fed easing may be the only thing propping up the stock market amid weak economic data and declining corporate earnings.

To counter some of the sniping and criticism, Fed Chairman Ben Bernanke delivered a speech Monday titled “Five Questions about the Federal Reserve and Monetary Policy.” That got us thinking about five of our own questions we’d like to put to the Fed chief:

Do We Need Another New Deal?

By Bernanke’s own admission, the Fed has done pretty much all it can. Fixing what ails the economy is no longer a matter of monetary policy, but rather of fiscal policy. In other words, it’s up to policymakers, also known as the folks in Washington, D.C. (cough, Congress.)

Given Bernanke’s track record of extraordinary stimulus measures as Fed chief, would he advocate similar boldness on the part of the federal government? The central bank is supposed to steer clear of politics, but if it were up to Bernanke, would he push the button on massive Keynesian spending programs to kick-start hiring?

What’s the Exit Plan?

The Federal Reserve’s balance sheet ballooned by $2 trillion over the last three years. Inflation has gone essentially nowhere, despite all the money printing needed to scoop up those assets, and market expectations for future inflation remain low.

However, that doesn’t mean investors aren’t worried about it. Witness the popularity of Treasury Inflation-Protected Securities, in which investors are paying the government for the privilege of holding these bonds.

How does the Fed plan to unwind these balance-sheet positions without sparking inflation or distorting the economy? As well-regarded fund manager John Hussman of Hussman Funds notes: “If [the Fed] ever has to disgorge this debt, even over time, the sale would crowd out 20% of U.S. gross private domestic investment for 5 years running.”

If QE Isn’t Enough, Then Why Do It?

As Bernanke reiterated in his press conference following the last Fed meeting: “Monetary policy, as I’ve said many times, is not a panacea. We’re looking for policymakers in other areas to do their part.”

Furthermore, Bernanke has no illusions that he and his fellow central bankers are waving a magic wand. “I personally don’t think that it’s going to solve the problem,” Bernanke said of QE3. “But I do think it has enough force to help nudge the economy in the right direction.”

With unemployment stuck stubbornly above 8%, the economy needs a lot more than a nudge.

Why Target Mortgage Bonds?

Under the latest round of quantitative easing, the Fed has pledged to buy $40 billion worth of mortgage-backed securities a month for … well, for as long as it takes. But what’s the reason for the Fed bringing its balance-sheet fire power to bear on mortgages?

True, there has never been an economic recovery without the housing market participating, but then prices were picking up ahead of QE3 amid already record-low mortgage rates. Furthermore, housing is no longer a fountain of employment. Home construction accounts for less than 2.5% of GDP these days. How and why is this transmission mechanism for monetary policy expected to work?

Obama or Romney: Who Are You Voting For?

Bernanke is a Republican, appointed by the second President Bush, but he’s excoriated by his own party. Mitt Romney rejects quantitative easing. Running mate Paul Ryan is a Fed-basher, calling Fed policies “sugar-high economics.” Republican Ron Paul wants to abolish the entire Federal Reserve system.

Indeed, if Romney wins, Bernanke is likely out of a job when his term as chairman expires in January 2014. So, Ben, who are you voting for come November?

Endnotes:
  1. buys up debt securities with newly minted money: http://investorplace.com/2012/09/qe3-is-here-hooray-quantitative-easing/
  2. always been controversial: http://investorplace.com/2012/09/5-things-qe3-wont-fix/
  3. potential to unleash rampant inflation in the future: http://investorplace.com/2012/10/dont-fear-the-inflation-bugaboo-just-yet/

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