Bernanke Speaks. But What Did He Say?

Photo: Medill DC

So Ben Bernanke finally spoke today. And as I predicted yesterday, all the early headlines are expressing disappointment that he didn’t announce QE3. But this disappointment is misplaced. New policy announcements are for the Federal Open Market Committee (FOMC), not the Chairman. The most he could do is give an indication of where he thinks things will go.

And he thinks they should ease policy.  Soon.

Here’s the case he made:

1. Unemployment is too high. This is the usual argument for easing monetary policy.

2. Inflation is below target. The usual constraint preventing this doesn’t bind.

3. The possibility that high long-term unemployment may persist “adds urgency to the need to achieve a cyclical recovery in employment.” There’s a special reason to be more aggressive.

4. “The growth fundamentals of the United States do not appear to have been permanently altered.” Dismissing the counter-argument that this is structural.

5. “[T]he Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.” He’s not out of ammo.

6. The FOMC is now going to meet for two days instead of one to discuss how best to use them. They’ve got to figure out how to load the guns.

Reasons No. 1 and No. 2 are the standard case for monetary easing. No. 3 is the case for urgency. No. 4 poo-poos the naysayers. No. 5 says we can ease. No. 6 suggests he wants to. Add it up, and you have a slam-dunk case for monetary easing. And I think it’s the right case, too.

So I read this as Ben saying: “Here’s the case I’m taking back to the Federal Open Market Committee. When we meet, you’ll hear what they decide.”

This is really the strongest signal he could have sent. QE3—in some form or another—is on its way, probably in September.

The other highlight was Ben warning Congress against short-term spending cuts and fiscal shenanigans that could kneecap the recovery. I hope they’re listening.


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  1. Clancy says:

    How will Bernanke keep hiding his intentions now that you’ve cracked his secret code?

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    • Hildegard L says:

      Excellent! The best comment I read about the issue which is similar to the weather: everybody is speaking about it but nobody has an idea of what it is about. So most comments are just noise ……

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    • Hildegard Liechtenstein says:

      Why the hell should he want to hide his intentions?????????
      Just on the contrary………… it was a means to calm the markets

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  2. Axel Kaiser says:

    And after QE3 the same case will be made again for QE4,5,6…is the premise which is wrong and Bernanke can not see it…we are on the way to an inflationary disaster…time to put Keynes away and try something that really works: austrian economics.

    Well-loved. Like or Dislike: Thumb up 24 Thumb down 15
  3. Andrew Krause says:

    QE1 and 2 didn’t help and probably hurt. Like a bad hollywood movie, were getting a part three?

    I never thought Id see the day that Ron Paul sounded rational.

    Hot debate. What do you think? Thumb up 20 Thumb down 17
    • Mike B says:

      How did they hurt? Making us exports more competitive?? Disarming deflation? Just because a monetary spiral will increase the value of your assets it doesn’t mean it is good for the majority of Americans who are in debt.

      Hot debate. What do you think? Thumb up 12 Thumb down 12
      • Gordon B says:

        Malinvestment is the problem, not the solution.

        Pouring money into projects of dubious value to prop up a credit-fueled bubble will only make the next crash worse. Maybe our efforts are better spent investigating the actual problem (bubble caused by excessive credit expansion) and not wasting effort trying to prop up the inevitable crash. QE2 worked for a few months. What will the half-life be on QE3? Over indebtedness can not be cured by more debt.

        Debauching the currency to help out debtors who made stupid decisions hurts savers, poor people, and those on fixed income. Count me out on that plan.

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  4. jimmsans says:

    Thank goodness. We all see how well QE1 and QE2 worked out.

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    • Mike B says:

      Well, we still have an economy and I’m not standing in a bread line. Given the circumstances I’m pretty happy with that.

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  5. @DocStocks says:

    Unfortunately until parallel universe research takes off, we will never know what would have happened without the first two rounds of QE. IMHO things would likely be worse.

    And, by the way, Keynes was more about fiscal policy. Let’s be honest, and I agree that all sides deserve blame, there has not been true fiscal stimulus. There has been no New Deal style programs and (thank god) there is no WWIII on the horizon.

    Well-loved. Like or Dislike: Thumb up 19 Thumb down 1
  6. Mike B says:

    Why can’t they charge banks for parking their excess reserves at the Fed? That change sounds like a real slam dunk and in the worst case would only generate additional Federal revenue. It might not have a huge effect, but it’s a no brainer to throw it in conjunction with other tools.

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    • caleb b says:

      Mike B, I work for a bank. Loan demand is very, very weak. The FDIC is extremely cautious in bank exams and requiring draconian levels of liquidity and capital. Word is, 14% capital is what they are shooting for. Since banks make money on leverage, 14% capital versus 6% required years ago means half as many loans can be made.

      Good businesses that meet the FDIC’s guidelines as “good credit risk,” don’t want to borrow money.

      Plus, the “common knowledge” is that rates can’t stay this low forever. Banks don’t want to make a fixed-rate 30 year loan at 4-5% when they know that in two years rates will probably be back to a “normal” 7-9%. Make a loan a 4% today, and in two years your borrowing costs will be 4.5% and you’re underwater. Bank failures all over again.

      One other thing to mention….there are a ton of zombie banks out there. They have no idea how to value some of their holdings. Many of the junk CDO bonds that Wall Street cooked up were bought by the 8,000 or so community banks that do the vast majority of local lending.

      Bottom line: the banks are not hoarding cash because they’re stingy uncle scrooge types, they’re doing it bc of FDIC liquidity pressures, weak loan demand, low rates, and large potential future losses. Banks extending credit to unworthy borrowers got us into this mess, it won’t get us out.

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  7. brookie_d says:

    Anyone that thinks inflation is “below target” hasn’t set foot in a grocery store in the past few months.

    Well-loved. Like or Dislike: Thumb up 18 Thumb down 10
    • John B says:

      Remember, the CPI used by the Fed EXCLUDES food and energy costs.

      Of course, food and energy for survival, heating, eating and transportation are important expenses in the lives of real human beings.

      But why should reality interfere with the Fed.

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  8. Leo Godin says:

    “Add it up, and you have a slam-dunk case for monetary easing. And I think it’s the right case, too.”

    The right case for who? Certainly, Wall Street would love it, but since Wall Street is more and more disconnected with jobs, what will QE do for average people?

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