Friday, December 10, 2010

Clods and critics: Defending Bernanke

Get in with the in-crowd - More QE! really! The Fed missed. it never gets anything right! Aren't you tired of the same old criticism? I'll tell you one thing. The employment report for November was a real disappointment but bond prices FELL and STOCKs went UP after th release. markets acted as though it was good news. What that means for you is if you want to ride with a winner, it's time to get on the optimists' bandwagon and and off the pessimists bandwagon.

It is easy to be critical now. The Fed has lots of problems that it faces and few tools to attack them.

I found Bernanke's 60min performance about as good as one could expect.

It's complicated - As I am teaching Micro and Macro again at the Zicklin School of Business, I found Bernanke's comments on money quite illuminating. He is reminding us that the Fed NEVER prints money. And I'm not talking about the US mint either. The Fed provides markets with the raw material. Then banks use excess reserves to make loans; loan proceeds are deposited and the money creation process (money multiplier) is in gear. It is always in the hands of the banks. Always.

Putting the toothpaste back in the tube - Bernanke is trying to make the point that the massive injection of reserves is sitting there, just sitting there idle. When the Fed injects reserves it does TWO things (1) it pumps reserves into the banking market and (2) to accomplish that, it acquires assets. It is very complex to try and explain why the Fed is doing what it always does -and at the same time- why THIS TIME it thinks the cutting edge of policy different. This time it is the asset acquisition part of the operation not the reserve injection part. That is not the stuff for discourse on TV. Many economists do not seem to 'get' this. In any event, as long as banks sit on excess reserves, the Fed's reserve injections 'are not printing money'. They may be enabling the printing of money but since banks aren't doing it, how does enabling something that is not happening translate into doing it?

Since QE1 did not work banks have excess reserves on their books already.

Hand holding with the public- Bernanke is trying to reassure the public of two things: One, the Fed is not 'just' adding to that pile; it has another plan and, two, that all these reserves are not immediately inflationary. Until or unless they are lent they will not be an inflation factor. Banks hardly seem on the verge of doing' a 180' on lending. Hence his comment on money supply stands as correct.

Transitivity does not hold in economics or in football rankings- Michigan State University beat Wisconsin this year in football., Each team lost one game. yet it is Wisconsin is rated ahead of MSU. Because of that, Wisconsin gets to go to the Rose Bowl. How come if A>B then it is also true that A

Demand or supply? Money supply growth is picking up as the economy is picking up but that is not very well related to the enormous pile of excess reserves..Arguably the pick up is one of money demand not of supply.

Bernanke is trying to explain difficult, abstract, economic processes to a lay TV audience and I think he did a good a job with a complex subject.

Spokesperson not oracle - He is trying to bolster confidence which monetary policy needs to be effective. I think we can cut him some slack on being 'too certain'. Maybe saying that he is 100% certain that he can control this is not accurate... but can you imagine how everyone would have jumped down his throat had he used a number less than 100%.

Making policy effective - Getting support for his policies is a proper role for his public engagements. If you remember your early economics, it used to be call 'moral suasion.' Lying about policy effectiveness would not be right. But, here recognize that NY law allows businesses to 'boast' but not to engage in deceptive advertising.

Doesn't the Chairman get the same nuance?

Forget the facts it's Agenda City - I also think there is way too much negativism and that is what is hurting the economy. It is easy to be critical. There are different agendas here. Obama remained too negative far too long because he wanted to blame the Republicans for the economy and as a result he and the democrats did a worse job than they should have in promoting recovery. They paid in the polls. Wall Street wants QEII because it can make money off of it, whether it is a good idea or not. . Economists are afraid to stick their necks out on improved forecasts and bankers probably do not want a rosy outlook because they do not want to lend until the coast is clear. There are lots of agendas in the way of an 'objective' outlook.

Fearing Fear itself- All those economists fearful of the double dip did the economy a great disservice conjuring up risk when the economy did not dip again. Without all those fears don't you think the economy would have done better? I do.

Shame on all this negativism. Stop hiding under your bed.

1 comment:


The best thing that can happen is if the fed stopped printing money money printing equals inequality.