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.



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

Axel Kaiser

And after QE3 the same case will be made again for QE4,5, 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.

Andrew Krause

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.

Mike B

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.


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

Mike B

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


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.

Mike B

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.

caleb b

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.



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

Leo Godin

"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?


hahaha I can't wait to hear what delusional rationalizations you so called economists will come up with when shit hits the fan and dollar gets destroyed (through hyperinflation). Let QE3 flood in.

P.S. The real reason ofcourse will be the Fed and its "What?! The economy is in the tank? Let me better print money and give it to my big bank friends" attitide.


Of course. As Marc Faber said several months ago, "...they will do QE3, QE4, QE5 until QE26 – until the whole system breaks down."

Or until Keynes has finally been popularly discredited - like THAT's gonna happen!

John B

Yes, things are probably a little better with QE1 and QE2. But at what cost?

The amount of debt we have incurred is now impossible to pay back. All we can do is keep on rolling it forward--which can't be done "forever" even if the amount of debt was static. But as the debt is increasing at over $100 Billion a month, "forever" will end pretty soon.

The sole reason to keep rates so low is to keep the Fed and the feds from crashing now--while the wrongdoers are here. The way they are doing things, it will crash after they are gone--and they will then claim "look how good it was while we were in charge."

Spending the nation's future to score some political points in the present is irresponsible. And, unfortunately, will cause much greater suffering than we can imagine.

Brett Dunbar

The US national debt isn't especially large or impossible to pay back, net debt is about 60% GDP, at the end of the Second World War it was 120% of GDP. Britain meanwhile twice paid down debt of over 250% GDP, following the Napoleonic Wars and the Second World War.


Isn't it great when your actions create problems that cause people to turn to you to solve and they keep swallowing the same nonsense you fed them earlier?

marcus nunes

Justin. You´re quite right. The main message of the speech was to point out that there is a link between the short run position (deep inside the "ravine") and the long run "desired level" (where the economy is close to potential). And the two day meeting in September will likely be devoted to discuss how best to establish the "linkage". Below a brief history of the good and the bad done by monetary policy.


I cannot believe we are having this conversation. If we are doing science, then the quality of a hypothesis is based upon whether its predictions hold true. If they do not, the hypothesis must be abandoned or at least changed so that it's predictions occur.

The Keynesian cross predicts that inflation will increase when employment increases and inflation will decrease when employment decreases. In other words, they move in tandem. During the 1970's, employment decreased fairly dramatically and inflation increased fairly dramatically. Ergo, the hypothesis is falsified.

This is true only if we are doing science. If we are doing philosophy or theology, we can continue to believe the hypothesis. But if we are doing science, then we have to accept the truth.

I am not against the government stimulating the economy. I am against the government using a failed hypothesis to stimulate the economy. We will not be able to actually move on and try other ideas until we abandon ideas that don't work.

Look, I have a lot of respect for Keynes. Much like Aristotle, he moved science forward a great deal. But like Aristotle's earth centric universe, he was wrong about some things.


duyfuuy When can I see ah! I want to see!


So easing easing and easing is really the solution?