Ben Bernanke

However, although private final demand, output and employment have indeed been growing for more than a year, the pace of that growth recently appears somewhat less vigorous than we expected.

Remember how I was the wrongest person on the planet when I said the subprime mortgage bust was “contained” and wouldn’t cause a worldwide financial crisis? Haha, man that was dumb. Well, guess what, I was wrong again earlier this year, when I decided the time was ripe for the Fed to stop bailing out the economy.

Incoming data on the labor market have remained disappointing.

The working class is unbelievably screwed. This is kind of bumming me out.

Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year.

Double-dip recession, here we come!

Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.

Come on — do you know what would happen if I didn’t say that things will get better, eventually? Wall Street would commit mass hari-kari.

At this juncture, the risk of either an undesirable rise in inflation or of significant further disinflation seems low.

OK, sure, unemployment is in the toilet, but don’t expect us to do too much about it, because the only thing we really care about is inflation, and as far as we are concerned, everything’s fine on that front.

The FOMC has also acted to improve market functioning and to push longer-term interest rates lower through its large-scale purchases of agency debt, agency mortgage-backed securities (MBS), and longer-term Treasury securities, of which the Federal Reserve currently holds more than $2 trillion. The channels through which the Fed’s purchases affect longer-term interest rates and financial conditions more generally have been subject to debate.

OK, let me lay it out for you. The one thing the Fed is really prepared to do to help the economy is to keep purchasing debt, such as Treasury securities. By keeping our unbelievably monster huge portfolio of debt high, we theoretically lower the cost of borrowing throughout the economy. That should spur faster growth. We stopped doing this a while back, but so many people started refinancing their mortgages that our holdings of mortgage-backed securities began to disappear, which, ironically, meant that by not acting, we were actually contributing to a tightening of the money supply. That’s a big no-no when economic growth is flat-lining. So when the economy started to go downhill again, we changed our strategy — but not until after a big fight with members of the conservative faction of the Federal Reserve Bank’s Board of Governors who believe that even such a cautious step was far too aggressive. These guys just don’t care about unemployment. Some of them even think it’s time to start raising interest rates! Hahahahaha.

By agreeing to keep constant the size of the Federal Reserve’s securities portfolio, the Committee avoided an undesirable passive tightening of policy that might otherwise have occurred. The decision also underscored the Committee’s intent to maintain accommodative financial conditions as needed to support the recovery. We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.

I am not going to be responsible for yet another market crash. So I stomped all over the reactionaries, because even a blind man can see investor sentiment is as fragile as a 2-year-old on a sugar crash. I really don’t want to be remembered as the Federal Reserve chairman who presided over TWO recessions. So let me tell you plainly: If the shit really hits the fan, we’re going to open the taps wide open, buy every Treasury bond in sight, drop money from helicopters, and keep the U.S. economy on life support.

This is why, incidentally, the Dow Jones Industrial Average is back over 10,000 points. Yay me!

A rather different type of policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability. I see no support for this option on the FOMC.

Paul Krugman, who is one hell of a pain in the ass, believes that the Fed is far too concerned with keeping inflation low. He keeps whining about unemployment, and thinks that if we just did so much as announce that we are prepared to accept higher inflation, and then pursued monetary policy along those lines, the economy would get a steroid boost that would finally shake it out of its doldrums. Sorry, but that is completely nuts and it is NEVER GOING TO HAPPEN. Ever! Please shut up, Paul.

Inflation expectations appear reasonably well-anchored, and both inflation expectations and actual inflation remain within a range consistent with price stability.

I know, I know, the Federal Reserve is entrusted by Congress with two mandates — promoting full employment and keeping inflation low. But everyone knows that we only really care about price stability, so never mind what I said before about the shit hitting the fan. As long as inflation is fine, we’re only going to take baby steps.

Despite this recent slowing, however, it is reasonable to expect some pickup in growth in 2011 and in subsequent years.

Somewhere, over the rainbow, skies are blue.

Just to put things in perspective,  the Fed “committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.” That’s also more than 10 times the size of TARP — the bailout administered by the U.S. Treasury. It’s no wonder that a long line of banking spokespeople and financial institution CEOs refused to comment to Bloomberg for the story. What’s left to say?

The report is must reading for followers of the emerging history of the financial crisis for obvious reasons. But tracking the reaction to the revelations from some liberal commentators to the news has been intriguing. Paul Krugman, Matthew Yglesias (newly ensconced at Slate), Mother Jones’ Kevin Drum and Mike Konczak at Rortybomb are all singing the same tune: The problem, they say, is not that the Federal Reserve moved heaven and earth to shovel trillions of dollars at the banking industry — that, in fact, is exactly what you want the central bank to do in the middle of a banking panic. That’s how Great Depressions are prevented.

The outrage, they all agree, is that the same determination and all-in blitzkrieg wasn’t aimed at unemployment and the foreclosure mess and the myriad woes affecting the rest of America. The 1 percent got a gift-wrapped bonanza, while the 99 percent got the shaft. As soon as the financial panic subsided and stock prices started to rise, policymakers started worrying far more about inflation and deficits than actual human suffering. And that’s unacceptable.

I personally have no argument with that basic thesis. We can definitely question the exact tactics employed, and speculate, as do the above-mentioned commentators, on whether Obama would be better off, politically, if a harder line had been taken against the banks, in return for saving their bacon. But I too am glad that, bottom line, the Fed stabilized the financial sector. The 99 percent would have an even harder time finding jobs if the six biggest banks had gone bankrupt.

But I find myself wondering how this nuanced interpretation intersects with the anti-Wall Street animus that bubbles in the hearts of both Tea Partyers and Occupy Wall Street protesters. For fully understandable reasons, there’s a sizable contingent of Americans who would take pleasure in the sight of Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase crashing and burning. At the conservative end, there are many who believe that nobody should get bailed out, period. On the liberal end, there’s a sense that government aid to the banking sector has aided and abetted growing income inequality. At the voter level, there’s very little appetite, at any point on the spectrum, for a “well, some actions, even if we don’t like them, are necessary for the greater good.”

Politically speaking, such a dynamic spells trouble for Obama in the year ahead. His Republican opponents will surely use the Bloomberg report to tap popular anger and slam the Fed. Everyone, on this platform, is a wannabe Occupy Wall Streeter. Whoever ends up as the Republican presidential nominee will be under no obligation to explain that sometimes the medicine doesn’t taste very good. Meanwhile, Obama faces the unhappy prospect of defending the nasty medicine that kept Wall Street afloat while simultaneously explaining why his administration hasn’t been able to engineer a similar rescue effort for Main Street.

The statement released by the Federal Open Market Committee was the most downbeat of the entire year to date. After months of telling us that the slowdown was caused by temporary factors that would ameliorate before the end of the year, the Fed was forced to acknowledge that there are “significant downside risks to the economic outlook.”

So the Fed took action, and while the steps it unveiled were more aggressive than most people expected, and certainly constituted a rebuke to GOP congressional leaders who were telling it not to do anything, the strategy isn’t going to be enough to make a significant difference. That’s a downer: When you acknowledge seriously deteriorating conditions but take insufficient action to address them, you inject more fear into the markets.

So what exactly did the Fed do? What is Operation Twist?

There are two key elements.

First, the Fed announced that, over the next nine months, it would sell $400 billion worth of short-term government securities and buy $400 billion worth of long-term government securities. This doesn’t change the overall Fed balance sheet, so it can’t be caricatured as “printing money.” But what it does do is change the average length of duration of the securities that the Fed is holding.

And that, in turn, means that there will be fewer long-term securities available on the open market for other investors to buy. Scarcity will increase demand, and in consequence, the yields on those bonds — the interest rates that the U.S. government has to offer to attract buyers — will fall. This will effectively lower borrowing costs throughout the entire country. And theoretically, that should stimulate economic activity.

Second, the Fed announced that it would reinvest the cash from expiring mortgage-backed securities into new mortgage-backed securities. This represents a reversal of the Fed’s previous strategy, which was to allow its huge portfolio of mortgage-backed securities to gradually shrink. The result of this reversal should be downward pressure on mortgage interest rates, which would, again theoretically, result in an upsurge in refinancing and a boost to the housing market.

Economists generally agree that these moves will have some impact. The problem is that they just don’t expect it to be very large. Borrowing costs are already very low, but gunshy banks just aren’t willing to make loans, no matter how cheap the cost of capital. The main problem afflicting the U.S. economy is a massive shortfall of demand, and tinkering at the margins with interest rates isn’t going to change much. As Paul Krugman pithily put it, the Fed’s action is like “using a water pistol to stop a charging rhino.”

However, the fact that the Fed felt compelled to make these moves, even after receiving a letter from the Republican congressional leadership demanding that it take no “extraordinary interventions” in the economy, and in the context of Republican presidential candidates declaring that such intervention is “treason,” is all the proof we need that the U.S. economy is in trouble.

What the Fed announced yesterday is hardly “treason,” by any sane interpretation. One could even argue that it doesn’t measure up to the level of “extraordinary.”

But it’s also not enough to cure what ails us, and that’s why markets are plummeting.

Responding in part to the turmoil that disrupted financial markets after Standard & Poor’s decision to downgrade U.S. credit, and in part to the increasing evidence that the economy was slowing faster than previously predicted, the Fed announced that it was committed to keeping interest rates at “exceptionally low levels… at least through mid-2013.”

Three members of the committee dissented from the decision. In a somewhat cryptic postscript, the official press release noted that “Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser… would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.” (Emphasis mine.)

The difference between “an extended period” and “at least through mid-2013″ might seem a picayune matter to most people. But it’s been 19 years since as many as three members of the Open Market Committee have dissented at the same time. In Fed terms, that’s at least a mild earthquake. Within the confines of this slender semiotic gap we can see new evidence of a major split between the Fed’s “hawks” and “doves,” as well as irrefutable proof of a crucial failure by the Obama administration to exert its influence on economic policy.

In Fed parlance, hawks are worried that low interest rates will lead to excessive inflation. Doves believe that inflation isn’t currently a threat, and taking measures to stimulate the economy and spur job creation should be a higher priority. By advocating for the term “extended period” instead of for a longer  commitment, the dissenters were implicitly arguing that the Fed should be keeping inflation fears on the front burner, as well as sending a signal that any more ambitious, unconventional form of monetary easing should be strictly avoided.

Fisher, Kocherlakota and Plosser are all well-established as hawks — and some are stout critics of any government intervention in the economy (in 2008 Kocherlakota signed a petition opposing Obama’s stimulus). But that’s not the only thing that they have in common — all three are also presidents of regional Federal Reserve banks. And that’s an important fact to keep in mind when conducting amateur Kremlinology on how the Committee makes decisions.

Normally, the Committee is made up of 12 members. Seven are “governors” appointed by the president of the United States to 14-year terms. Five are presidents of the Fed’s 12 member banks, rotated into the Committee for one-year terms. But the bank presidents are carefully “insulated” from the political process. The directors of each bank choose their own bank president, and six out of nine of those directors are in turn chosen by the banks who make up the Federal Reserve system.

What does that mean? It means at least five of 12 FOMC members owe their allegiance primarily to the banking sector. The fact that three out of those five are currently the most hawkish members of the Committee is not an accident. Banks hate inflation.

But here’s where this story really goes off the rails. Two of the seats allotted to the Board of Governors are currently empty. Even worse, there are no outstanding nominations for those seats. This constitutes criminal negligence on the part of the Obama White House.

It’s not all Obama’s fault. He has already appointed three governors — Janet Yellen, Sarah Raskin, and Daniel Tarrullo (and he also reappointed Bernanke.) So his stamp is on four of the 10 curent members. And of course, one of his other nominees, the Nobel-prize winning economist Peter Diamond, ran into the same stone wall of opposition from Senate Republicans that has thwarted so many other Obama nominations and initiatives.

But if Bernanke’s cautious leadership derives in part because, as economist Justin Wolfers writes, he has only the support of a “slim governing coalition,” the fact that there are two vacancies on the Committee that should already be occupied by Obama nominees has got to be a major reason why. As Matthew Yglesias moaned earlier this month, “if it’s not possible to work something out, then there ought to be a partisan fight.”

Just letting the power to appoint people to the most important economic policymaking institution in the country languish isn’t an acceptable outcome. The single largest influence on President Obamas re-election prospects is the short-term performance of the economy, and the single largest influence on the short-term performance of the economy is the Fed.

This should be a campaign issue. Republican intransigence is preventing the President of the United States from appointing Federal Reserve members empowered to fulfill one crucial part of the Fed’s dual mandate — full employment. If Bernanke isn’t willing to be aggressive, one reason why is that he just doesn’t have the troops.

I’ve read and watched more Bernanke speeches than I care to remember over the past five years, and I can’t think of one that contained less content or meaningful analysis — aside from a few jabs at legislators for the debt ceiling negotiation fiasco. Not only did Bernanke decline to announce any new initiatives to address the fact that unemployment is still over 9 percent, — and, according to the latest GDP revision, economic growth for the first half of the year grew  a pathetic .7 percent, he didn’t even specify in any detail what the Fed could do if it was so willing. Instead, he pronounced himself “optimistic” as to the long-term growth potential of the U.S. economy.

“It may take some time,” said Bernanke, “but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”

In the meantime, we’ll do zip. Not my problem, was the message, loud and clear. I wonder if President Obama is finally regretting his decision to reappoint Ben Bernanke to a second term as Federal Reserve chairman.

The only section of the speech that contained an interesting nugget came in an oblique reference to whether government should be doing anything to spur employment in the short term.

“Normally,” said Bernanke, “monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view…”

Bernanke went on to argue that since the “extraordinary high level of long-term unemployment” could be expected to harm the long-term prospects of the economy, boosting jobs now could help later.

Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.

Well, yes. So what are you going to do about it, Mr. Chairman?

The answer, today, was nothing.