Why I LOVE Ben Bernanke And YOU Should TOO; Or..., How Things Actually Work!!!
June 22, 2011
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There is an entire cottage industry that has arisen both on this site, and also on sites like Pragmatic Capitalism, and elsewhere, involving the bashing of Ben Bernanke. Nothing makes you seem smarter than bashing Helictopter Ben.
Here's the problem: it's all nonsense.
In the face of inaction by our sclerotic, inept, dishonest and future-denying political class, in both parties, I would argue that Ben Bernanke and the Fed are the primary reason that life, while not good, is as good as it is, following the crash of 2008/2009. Let me make a few specific points:
1) QEII Is Not Truly Ending and There Will be No Horror on July 1, 2011 -- For an excellent though not entirely complete explication of why the "end" of QEII is not really the end, and why it is not, not going to cause a massive increase in interest rates or a massive decline in the stock market, please see here, and here, and here. These posts also offer a good explanation fo why QE and QEII are largely not responsible for the huge recent upswing in commodities. The end of QEII is reminding me a lot about Y2K worries. I generally find that if you invent a good acronym for things, they can sound really scary. Some of the market softness in the last few weeks has been in anticipation of something that is going to be a non-event. (Some of the drop reflects deteriorating fundamentals in the economy.)
2) The fed creating a risk of hyperinflation -- Everytime you hear someone say the Fed is "printing money," take a picture, because you are at that instant having the privilege of listening to someone who is totally illiterate about our monetary system. Unfortunately, this includes much of the press. The fed has been expanding the monetary BASE (in that sense it is printing money), in the form of excess reserves, which does not necessarily translate to greater M2 (or any other kind of) money supply. See here. Moreover, see the same spot for how the Fed could control inflation if it did start to occur. The post in that link is semi-illiterate, but I asure you you can find many other articles on the web explaining excess reserves and the interest rate that the Fed pays on them. There are many, many other articles about this on the web as well.
3) Freaking out about deflation, no..., inflation, no..., deflation, no..., wait, where was I? -- Ah how quickly we forget. But how quickly we remember. The months from November 2010 through about May 2011 have been characterized by a FLOOD of worries about severe inflation, and QEII, etc., etc. See number 2, above, for why that is nonsense. But what all of these genius market commentators have forgotten is the horror, the worry, the certainty, in May 2010 through August 2010 that we were facing a strong, strong, likelihood of a double dip, and deflation. Have you forgotten that? Are you in denial about that? Here is a brief refresher. I could post 100 more. What QEII did was remove the fear of deflation. To that extent, yes, it caused the markets to rise. It convinced the markets that the Fed would not allow deflation to set in. As Ben stated again today (and I am so, so, so sorry I could only find this on the spur-of-the-moment on Zero Hedge), last summer the TIPS market was pricing in a 30% chance of outright deflation. Do you have any clue how bad that is? And the Fed did such a good job of turning that around that within months, thousands of bloggers started freaking out about inflation. The Fed even bought some TIPS, which I hilariously saw one blogger say was a statement by the Fed that it expected inflation and itself was seeking protection. Oh boy oh boy would I love to play poker against that blogger. Sign me up.
4) Distinguishing Double-Dip from Deflation: Now, predictably, worries about deflation and double-dip are arising again. Understand that the Fed can, and will, and should do QEIII if it looks like we are entering real deflation. For a variety of reasons, the Japanese did not properly fight deflation, largely political reasons, unsurprisingly. Please, if you have not, read Ben Bernanke's 2002 speech regarding deflation at least twice. As Ben stated then, and as he reiterated today, a sufficiently determined central bank can always stop deflation. He may not be correct about "always" -- I hate absolute words. But a central bank can do an awful lot, only some of which he has been called on to do. What the Fed cannot necessarily do is prevent a double-dip, or a recession (see below, on "handling the economy"). Nor can any human being fully understand all of the dynamics of the U.S. or world economy, which is why people who are crowing about how Bernanke does not know why we are in a soft-patch are morons. Nobody knows. Nobody can know. Gagillions of decisions are involved in that, most of which are not, and cannot be, tracked. We can only model as best we can, all of us. Much of it is psychology, and much of it can only be known a year or more after-the-fact, if ever.
5) Ben Bernake Does is Not Responsible for the "Economy": The poll on today's Fool blogcast or whatever it was about Bernanke's speech perfectly encapsulates another misconception. The poll was something about how we thought Bernanke was "handling the economy." Here's what I wanted to respond with: Handling of the economy is largely the job of the President, and of Congress, and of local governments, and NOT of Bernanke or the Fed. The Fed's job is: 1) prevent deflation or excesssive inflation; 2) maintain employment levels. Ah, but you say, that second one in particular sounds a lot like handling the economy to me. No, no, no. This latter half of this is an quixotic mandate that Congress has given the Fed, when in fact, all kinds of Congress's and the President's own policies, decisions, and regulations (not to mention the decisions of local governments), are at least as consequetial if not more so than are Fed actions, in determining the unemployment rate. Decisions made two decades ago about how to subsidize education or not are partially responsible. NAFTA is partially responsible. That's why, when we poll people on Congress, and on the President, we ask if we approve of their "handling of the economy." Not the Fed. The Fed creates one PREREQUISITE of a decent economy. The President and the Congress (and companies, let's not forget those) create or destroy economies. And frankly, to a certain extent none do, to a certain extent there will always be an ebb and flow between panic and euphoria and back again, ad infinitem. Market cycles cannot be stopped.
6) Long Term vs. Short Term Deficit -- Ben has also stated that we should NOT cut this year's deficit, but that we should cut the long term deficit, mainly by trimming social security and medicare spending. The first clause in that sentence drive conservatives nuts. The second clause in that sentence drives liberals nuts. So here's a clue: whenever you manage to say something that drives both conservatives and liberals nuts, and which nobody in Washington, D.C. is doing or listening to, you are 99.99 percent certain to be speaking that absolute gods-honest truth. In this case, we need to cut long-term spending. That is 100% true. Does anyone debate that? That is what our problems are. That is what you cannot get any Democrat to admit, because they will not touch an entitlement program, and they positively drool with joy at the prospect of running ads saying that a Republican tried to cut one.
At the same time, there is not the tiniest shred of evidence that we are in imminent threat of default. We are simply not. There is no need to cut PRESENT 2011 or 2012 spending "now." Additionally, people who say that recent government spending on the stimulus (to the extent it was spending, as opposed to tax cuts, which people also neglect to mention) has harmed the economy are dead, flat wrong. The whole problem of 2009/2010 was that banks stopped spending and consumers stopped spending. It was a vicous cycle. If the government had not spent those tax dollars, there would have been even less spending in the economy, because consumers/taxpayers would not have spent it, they were too scared to spend it. Even if you had your job, were you to scared to spend a ton of money in November 2009? I sure as heck was. If you were not scared to spend, then you were insane. The government stepped into the spending breach (insufficiently, in my opinion).
Do not conflate you legitimate (VERY legitimate) worries about long-term spending and deficits with worries about today. That is is the sin of the Republicans. Huge immediate cuts now, as in 2009, will harm the economy and destroy jobs in the short term. Period. The government is spending 100% of that money it is spending (by definition), whereas consumers will not spend 100%. Period. Less money spent, less goods bought, fewer jobs. Or, less money borrowed today, and less money spent today, fewer jobs. Period.
Bernanke, a Republican, is 100% right about getting long-term deficits under control. The threat of long-term deficits is hugely reducing confidence in our recovery, and in America, and is therefore having a real impact on growth and on the economy.
Republicans in Congress understand that social security and medicare are politically UNTOUCHABLE right now (especially after the Paul Ryan medicare debacle), so instead of doing what they honestly know is correct (except for Paul Ryan, who is a man of honor and political courage, though I disagree with his solution) they are instead focusing on immediate cuts. This satisfies their base (who completely fail to distinguish between long and short-term deficits) and -- BONUS! -- it has the added bonus (and smart Republicans know this -- oh very much so) that if they cut a ton of spending in 2011 and 2012, that will really hurt the economy, now, which will make the President's reelection much less likely, and will hurt Democrats in the Senate as well.
So they are gambling yours and my jobs on that. The Democrats are, by contrast, simply trying to punt on everything, which is what Democrats typically do, and hope for the best and that the economy will improve and make this nasty issue that their union and AARP friends are upset about just go away. Their policy essentially is (fingers in ears): "Meh-meh-meh-meh-meh, I cannot hear you." Both parties are being irresponsible, but at least the Democrats have not embraced this pernicious insane version of economics that argues, in its essentials, that: 1) spending is somehow not economically valid spending if it is government spending; 2) even though government spending is bad -- as if when the government buys a plane or pays Joe Scmoe to repave a road it does nothing for the economy. Nutso, people. Nutso.
7) Bernanke is not God -- He's not right about everything. What I'm really hoping thirty people will do is post about his years-ago comments concerning the likely minimal impact of subprime on the economy, because I've really never heard that one before, and I will really appreciate the newsflash. There are some others as well that I would like to hear about, so please hold forth. The point is that: 1) QEII was proper; 2) it largely accomplished its goal of making oodles of people more concerned about inflation than about deflation; 3) relatedly, please understand that whenever you posted between 11/2010 and 5/2011 all about how flawed the core CPI was and how misleading it was and how really inflation was much higher, do try to understand that that, metaphorically at least, Ben was laughing at you, and checking another box off of his market-expectations to-do list, because it was another sign he had successfully turned around market psychology, which, in the end, is vastly more important than numbers and statstics; 4) double dip does not necessarily equal deflation; but 5) if signicant deflation expectations (as opposed to double-dip expectations) arise again, then the Fed, and Ben, WILL do a QE3 -- there is no if. It will happen in that scenario, unless Ron Paul has managed to end the Fed and take us all back to 1910 by the time those expectations arise.
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So there you have it. An expression of the motto, "Maybe in error, never in doubt." I may be wrong. I speak confidently, even sometimes insultingly, but with the full realization I may be wrong. However, I suspect that I am way more right than the vast amount of trash you see posted throughout the internet, including on many of the blogs here. If you do disagree with me, and you want to call me and idiot, I fully support that. Go wild. Just do it after you have read a few of these links I'm citing to.
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