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Ben Bernanke: The Decider
“There are three kinds of people: Those who make things happen, those who watch things happen, and those who ask, ‘What happened?’”
“Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war...”
The leadership void in the U.S. was illustrated this past summer by the dismal display of policy dysfunction in Washington that led the country to lose its AAA credit rating. Europe has fared no better, with its dithering politicians bickering like so many children in a schoolyard.
U.S. policymakers made one of their first serious blunders in this crisis in 2009 when they crafted an economic stimulus plan targeting consumption rather than investment. The benefits of the stimulus therefore faded rather quickly, which is to say the stimulus had a low or negative fiscal multiplier. The money would have been better spent on investments, which tend to have longer-lasting benefits that boost the national standard of living.
Consider this example. When Uncle Sam divvies out stimulus checks to consumers it leads to increased purchases of pants, socks, shoes, a hamburger, a garden hose, you name it, but the purchase of these and other everyday essentials do nothing for America’s long-run growth potential. Investments, on the other hand, have longer-lasting benefits. Consider the benefit of investing in a highway, or an energy grid – it lasts years. In other words, an investment of this sort has a relatively high fiscal multiplier – it is the gift that keeps on giving.
Amid great economic stress, policymakers have missed many other opportunities to improve the situation and thus better the lives of people. It took four years, for example, for the United States to approve free trade agreements (FTAs) it signed with South Korea, Panama and Colombia. This is reprehensible considering that the FTAs will likely be additive to U.S. economic growth. FTAs have proven to be very beneficial to the United States, providing a substantial boost to U.S. exports (see Figure 1).
2011, mind you, is the year the Baby Boomers (those born between 1946 and 1964) begin turning 65 years old. With little meat on the discretionary spending bone to cut, if the United States is to stabilize its finances it must reform its entitlement programs. This requires a political acumen and bravery lacking in today’s leaders who fear alienating the 42 million Americans aged 65 and up and the many millions who have 65 in their sight. Fear of political backlash from seniors is one of the major reasons why there was no grand bargain on the budget this summer. In other words, gerontocracy is dictating fiscal policy these days.
Entrenched in a perilous fog, people need beacons to guide them out. They need leaders to lift them up and to calm them down, and to protect them. Who among those that purport to be leaders can lay claim to having provided these comforts to the weary people of America and Europe this year? Where is the continuity of leadership needed ad infinitum in times of crisis? Oh, Joe D., where art thou? Are we forever to be led in the big game by politicians that walk out of the batter’s box and leave the park, they the Sultans of Not?
There are many who are nonetheless critical of Bernanke and the Fed, believing the Fed’s actions pose substantial costs and risks to the United States. Many, for example, blame the Federal Reserve for this year’s surge in energy and food prices, as well as for the acceleration in inflation worldwide. This is a claim that is not easily validated by the facts.
For example, while it is true that the lowering of interest rates and the creation of $1.6 trillion of excess bank reserves poses substantial risk to price stability, this notion applies only when the transmission effects of monetary policy behave normally. These days, however, the transmission effects have broken down, which is to say that monetary policy is not “transmitting” its way into the real economy in its usual way, either through stock prices, interest rate levels, corporate bond spreads, the U.S. dollar or bank lending.
Moreover, bank reserves pose no threat to inflation unless they are lent – only banks can utilize the monies the Fed injects into the financial system to expand the money supply. This hasn’t been happening; bank lending has been moribund. Only if the reserves are lent and therefore begin seeping out of “Yucca Mountain” (see article, “Yucca Mountain,” January 2011) can they be considered “toxic” and thereby spur inflation.
“In any moment of decision, the best thing you can do is the right thing. The worst thing you can do is nothing.”
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2015, PIMCO.
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