Bernanke Balked

Dolors & Sense

by Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—11/14/10—The Fed Chairman, rarely lost for words, sputtered a bit.

Asked at a press conference how he would advise Americans to act in this fourth year of a recession that ended officially over two years ago, the nearly omniscient scholar could manage only the most banal platitudes, amounting to something like: “Keep a stiff upper lip.”

But he really knows what they should do. Vote out the politicos that are thwarting Bernanke’s work by refusing to enact fiscal measures that complement monetary efforts.

Bernanke is like a cardiologist who is being asked to manage a cancer case. He is the wrong specialist for the job. And while he can do some good, he can’t cure the patient.

Monetary policy, the domain of the Fed, is next to useless in a recession that started with the bursting of a property bubble.

That’s because while the central bank can pump tons of reserves into the banking system, causing short interest rates to fall to zero and long ones to settle not much higher, it can’ t make people and institutions borrow, even at those bargain-basement levels.

When asset values plunge as much as they have done since 2007, people are not interested in taking on more liabilities. They’re scared. So they pay down debt, not build it up.

And even those who might be disposed to borrow can’t do so because the banks, stuck with their own asset-value losses (so gargantuan that they cannot be declared or realized), won’t lend.

So people and companies with reserves husband them. And banks squirrel away most of the deposits they are now becoming even loath to accept.

That leaves a surplus of savers facing a dearth of borrowers.

Normally, the interest rate is supposed to decline to rectify or equilibrate the imbalance.

It has but, as noted, still no or not enough takers.

This situation calls for the intercession of the borrower of last resort—the Federal government. The government too has balance-sheet problems, but it can, of course, induce the central bank to create still more bank reserves—enough, in fact, so that it can spend its days shopping in the Filene’s Basement of American society.

But isn’t that inflationary?

Two answers: 1. It is only inflationary if the resulting increase in the money supply turns over rapidly enough to put the expected pressure on productive resources and prices. Right now, there are so many tentative and parsimonious economic actors that unemployed resources remain huge and, as a result, the rate of turnover (called the income velocity of money) is anemic; and, 2. A little inflation in the core economy—that is, the non-food and fuel economy—is, at this stage of the economic cycle, better than a lot of resources idled for lack of demand.

But the Federal government, hamstrung by Republican ravings, won’t take up its position as borrower of last resort.

That inevitably leaves Mr. Bernanke frustrated and babblative, forced to parry serious questions with anodyne responses.