Bernanke Takes a Beating

Poor old Ben, I feel bad for him. Today’s Wall Street Journal carries an open letter from a long list of right wing leaning economists and other sundry analysts urging him to stop all this QE2 nonsense and get back to the proper course of reducing regulation, helping big business, and thinking of nifty ways to reduce taxes.

Well they don’t quite go that far, but you get my drift. They talk in proper terms: “… we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.”

This is standard right wing fare and nothing new. And I mean nothing new. Not new in this crisis, and not new at any time in the past three decades.

The problem they believe is that “The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed‰Ûªs objective of promoting employment.”

This sounds awful.

Debasement of the currency? Oh, horrors!

Increased inflation? Oh, double horrors!

The end of the earth is nigh because Ben Bernanke, Republican appointee and conservative though he may be, is pushing an agenda that will result in a debased currency and run away inflation.

And what is this evil policy?

Monetary policy.

Plain and simple. Old fashioned monetary policy. Albeit with a twist: instead of intervening in the market to reduce short term rates, the Fed has resorted to buying longer maturity assets. How dare they!

All that money will inevitably create inflation and send the dollar plunging. There will be a tidal wave of debasement, hyperinflation, and civilization will end – at least at the Harvard Club. Egad. Whatever next? Deficit spending? Apocalypse pending.

Setting aside my constant commentary that I don’t see where this inflation will come from – the inflation rate is miniscule and shrinking fast. There seems to be a problem here. What other policy, pray tell, is the Fed supposed to follow in the face of high unemployment and zero interest rates? There isn’t one. It only has one policy option. And let me repeat: it’s called monetary policy. The kind you would find advocated in the text books these people teach from. Indeed one of the signatories is none other than John Taylor the author of his eponymous rule the Fed uses to determine what interest rates should be. Last I looked that rate, according to the Taylor rule, was -5.0%. Which is not possible by any other route than QE2.

I look forward to a forthcoming revision from Professor Taylor. Along with an apology for having created so evidently a stupid rule.

Let’s just be clear about QE2: it may not work because adding boatloads of cash to an economy awash with cash seems like a long shot. Especially when no one wants to invest that cash in the US. So a great deal of that cash will spill over into the global economy where it will annoy people like the Germans, Japanese, and Chinese all of whom are trying to avoid dealing with their own economic imbalances. They don’t want the dollar to fall because that decline would force them to address issues in their various domestic economies. Like reducing their exports and making more stuff for their own populations. Annoying these folks is not a bad thing when our own survival is at stake.

Further, even were it to work, QE2 looks as if it is too small to drive the economy off the rocks by itself. It needs to be complemented by fiscal policy. Which is not going to happen.

Thus the risk of inflation is practically zero. We have an economy stuck in a glut of over capacity. It is suffering rapidly declining core inflation and appears headed towards deflation. Our problems are not at all those suggested by the signatories. The private sector is stuck. There is little sign that it will improve much, if at all, from where it is now. There is one and only one way out: the government.

Therein lies the rub.

The signatories hate the notion – with a near religious commitment – that the government can do anything to help save the economy. So they want to stifle the Fed. It is a “quasi” arm of the government. So it must be stopped before it succeeds else then ideological basis for the right wing collapses.

It doesn’t matter that ordinary people have a huge stake in the success or failure of policy. Or that the policies put forward by the likes of the signatories are exactly those that caused the crisis.

No not at all.

We the people merely exist to support corporate profit making and a sound currency. Even if that means being unemployed. It’s the American way.

Any intelligent observer of the request for more support for business might ask: what should we do to help businesses invest? After all businesses a knee deep in cash and are not currently investing. What else do they need?

Bernanke answers that by lowering rates in order to induce spending.

The right wingers don’t want to go that route. They want to boost profits by giving out tax breaks. This is despite the fact that profits are good and cash flows sufficient. They want us to believe that throwing more breaks to business will somehow set them in motion.

Why? If they are not in motion now?

So I repeat: the problem is not a supply side problem. It is a demand side problem. People are not buying. So businesses are being cautious. Throwing all the cash in the world onto business balance sheets won’t change a darned thing.

One last gripe: the policy Bernanke is pursuing is straightforward monetary policy with that twist I mentioned. It is monetarism. As in Friedman, doyen of the right. Are these signatories abandoning their intellectual leader?

I wish.