SALON

Saturday, Sep 1, 2012 1:00 PM UTC

Ben Bernanke speaks!

On Friday, the Reserve Chair explained how the federal government can help the economy with the funds rate at zero

By

Topics: Jared Bernstein, Federal Reserve, Ben Bernanke, U.S. Economy, Great Recession,

Ben Bernanke speaks! (Credit: Reuters/Jason Reed)
This originally appeared on Jared Bernstein's blog, On the Economy.

Federal Reserve Chair Ben Bernanke gave a good talk today—worth reading if you’re up for slogging through such things—wherein he stressed the benefits and costs of all the stuff the Fed can do to help boost the economy when their main tool—the federal funds rate—is stuck at zero.

If you were looking for Gentle Ben to announce that the Fed was going to apply more of its unconventional methods at a date certain, you were again disappointed.  But I didn’t expect that.  The committee is meeting is less than two weeks, and they’ll be another jobs report between now and then.

But I thought the subtext of the speech was: “our asset purchases and forward guidance (buying a lot of debt and saying they’ll keep rates low for a while) have worked pretty well, maybe increasing GDP by 3% and adding 2 million jobs.  Yes, these unusual moves by the Fed can turn out badly, but we’re aware of that potential and think we’re good.  And there’s just too many people stuck in unemployment.  Also, prices seem very stable to us.  So, unless there’s a clear acceleration in growth right around the corner, we’re going to rock some more unconventional easing real soon.”

The benefits of these actions are lower interest rates and higher asset prices than would otherwise prevail, along with more policy certainty about future Fed moves, all of which are, according to Fed research, behind those growth and jobs results just noted.

The costs, as Ben enumerated them, are:

–The Fed can dominate the market for the assets it acquires, thus distorting their price;

–Markets worry that the Fed has acquired so many assets that it can’t safely unwind (sell them back to private investors) without disrupting markets and prices;

–By driving interest rates so low, the Fed triggers a bubble as investors imprudently “reach for yield;”

–If interest rates should spike, the Fed—which like any bank holds liabilities to match its assets—could incur losses.

Re that last point, so far, the Fed’s asset holdings have earned them $200 billion which they’ve remitted to general revenue, as is the rule.  That’s well above their average remittances, btw.

I think the benefits outweigh the costs. The cost I take most seriously is #3, which militates a watchful eye on nascent bubbles, something the Fed has actually been very bad at in recent decades.  Ben mentions the role of new Financial Stability Oversight Council, created by Dodd/Frank financial reform.  No one knows yet how effective this new council will be in financial oversight…Keynes knows we need them to be very good.  But ftr, there’d be no FSOC under a Romney/Ryan admin, as they’ve pledged to repeal financial reform.  Just sayin’…

Finally, haven’t I argued that these Fed measures won’t do much absent more demand side action on the fiscal side?  I have, and I still think that’s right.  Ben himself warned of “sharp near-term fiscal contraction that could endanger the recovery.”

But there are many reasons for an independent Fed and one of the most important is to provide what the economy needs when politics are all bollixed up.  Which they are.

So get ‘em Ben!  Make your next move, dude!

Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden. Follow his work via Twitter at @econjared and @centeronbudget. More Jared Bernstein.

Next Article

Related Stories

More Related Stories

Featured Slide Shows

The week in 10 pics

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • Lisa Montgomery embraces her nephew Thursday after a tornado tore apart her home in Cleburne, Texas. The twister killed six people and destroyed entire swaths of the North Texas town.
    Credit: AP/LM Otero

  • Jack McMahon, the defense attorney for abortion doctor Kermit Gosnell, speaks outside the Criminal Justice Center in Philadelphia Tuesday. His client was convicted of killing three babies in his clinic, and will serve multiple life sentences.
    Credit: AP/Matt Rourke

  • A photo taken Monday captures Vice President Joe Biden's response to a Milwaukee second-grader's innovative proposal to end America's epidemic of gun violence. This guy!
    Credit: AP/Jenny Aicher

  • Sen. Rand Paul, R-Ky., flanked by a grouper-eyed Michele Bachmann, addresses the IRS' admission that it targeted Tea Party groups in advance of the 2012 election. In an op-ed for CNN Thursday, the Kentucky senator slammed the president for his faux outrage.
    Credit: AP/Molly Riley

  • Ousted IRS chief Steven Miller is sworn in on Capitol Hill Friday. Miller testified before the House Ways and Means Committee on the extra scrutiny the agency gave conservative groups applying for tax-exempt status.
    Credit: AP/J. Scott Applewhite

  • Attorney General Eric Holder pauses as he testifies on Capitol Hill before the House Judiciary Committee Wednesday. Holder is under fire, among other things, for the Justice Department's gathering of phone records at the Associated Press.
    Credit: AP/Carolyn Kaster

  • O.J. Simpson sits during an evidentiary hearing at Clark County District Court in Las Vegas, Nev., Thursday. Simpson, who is currently serving a nine-to-33-year sentence in state prison for armed robbery and kidnapping, is using a writ of habeas corpus to seek a new trial.
    Credit: AP/Las Vegas Review-Journal/Jeff Scheid

  • Major Tom to ground control: On Sunday astronaut Chris Hadfield recorded the first music video from space, a cover of David Bowie's "Space Oddity."
    Credit: AP/NASA/Chris Hadfield

  • When it rains it pours. President Barack Obama speaks during a news conference Thursday with Turkish Prime Minister Recep Tayyip Erdogan, inexplicably inspiring an #umbrellagate Twitter meme.
    Credit: AP/Jacquelyn Martin

  • A smoke plume rises high above a road block at the intersection of County A and Ross Road east of Solon Springs, Wis., Tuesday. No injuries were reported, but the the wildfire caused evacuations across northwestern Wisconsin.
    Credit: AP/The Duluth News-Tribune/Clint Austin

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

Comments

 2 Comments

Comment Preview

Your name will appear as username

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

follow salon

Most Read

Popular on Reddit

links from salon.com

From Around the Web

Presented by Scribol
listener_new_rect The Listener: Chekhov's story mirrors Russia's own

Recommendations