Quantum Pranx


Bernanke’s 21-month conversion takes 60 Minutes

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by Caroline Baum
Posted originally Bloomberg, December 07, 2010

He probably wishes he hadn’t said it, the part about the Federal Reserve not printing money and his 100 percent confidence in his ability to raise interest rates at the appropriate time to prevent an acceleration of inflation.

But he did. The Fed does (print money). And nothing is 100 percent certain in this world, except death and taxes. So what on earth was Ben Bernanke thinking when he talked to Scott Pelley on CBS’s “60 Minutes” Sunday night?

It was a different Bernanke than the one who sat down for an interview with the same correspondent on the same TV news magazine on March 15, 2009.

That Bernanke was humble. Viewers responded positively to him. Here was arguably the most powerful man in the world who hadn’t forgotten his small-town roots. A creature of neither Wall Street nor Washington, Bernanke inherited a financial system on the verge of collapse and, as he put it, he was forced to bail out Wall Street to save Main Street.

Sunday’s Bernanke was different, defensive. He was responding to his critics, both domestic and foreign, who are opposed to the second round of quantitative easing as either unnecessary, a case of overreach or dollar-debasing and therefore inflationary.

He looked more rested than he did in March 2009. In defending himself, Bernanke said some things that left critics and admirers scratching their heads. For example, take his contention about money printing. Here’s the comment in full to provide context:
“We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster.”

Literal Interpretation
Unlike his predecessor, Alan Greenspan, Bernanke isn’t known for his nuanced and obfuscatory statements. So I doubt he was referring to the physical act of printing coinage and notes by the U.S. Mint and U.S. Bureau of Engraving and Printing, respectively, which are part of the Treasury Department.

Of course the central bank prints (definition: manufactures or produces out of pixie dust) money. Bernanke invoked that power in 2002 to reassure the public that the Fed has the means to prevent deflation, or a decline in the price level: a “technology known as a printing press that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Broad money growth, which had been sluggish, is starting to accelerate. The latest figures show M2 growing at a 7.2 percent three-month annualized rate.

Compare and Contrast
Let’s compare the Bernanke of March 2009, working on little sleep and lots of adrenalin to keep the markets functioning and economy afloat, to the Bernanke of December 2010. Back then, Bernanke conceded that “It’s hard to forecast where we’re going.” It is hard – in both good times and bad. The uncertainty principle applies to both phases of the business cycle, not just a contracting economy.

Now, asked by Pelley what degree of confidence he had in his ability to act at the appropriate time to prevent inflation from accelerating, Bernanke said, “A hundred percent.” Bernanke, who told Pelley he wished he had seen the crisis coming and who told Congress in March 2007 the impact of the subprime crisis was likely to be “contained,” is 100 percent certain his model will alert him when it’s time to exit?

Political Posturing
Early last year, amid sightings of “green shoots” and a 200-basis-point spike in 10-year Treasury yields, it was all “exit strategy” all the time for the Fed. The shoots turned brown, and Bernanke’s exit strategy became a revolving door to get back in.

What’s so troubling about the Sunday interview is that it wasn’t Bernanke, the media-shy economist, talking. It was a politician attempting to bolster confidence in his constituents and support for his policies. That’s not an ideal character trait for a central banker at a time when official interest rates, already close to zero, can only go up. The opposition from Congress to any rate increase will be intense, especially when the Fed will have to embark on its journey to normalize rates well before the unemployment rate falls to an acceptable level.

In the March 2009 interview, Bernanke said that the biggest risk was that the U.S. wouldn’t have the “political will” to fight the crisis and would withdraw support for the economy too early.

After Sunday’s interview, we no longer have to worry about the Fed’s commitment to doing whatever it takes to promote a self-sustaining recovery. The real concern is policy makers won’t know when they’ve done enough. If history is any guide, we can be almost 100 percent certain that they won’t.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)


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