Global Central Bank Focus

Ben Bernanke: The Decider

Where political leaders have failed, Fed Chairman Ben Bernanke has succeeded in providing continuous leadership at a time of crisis.

“There are three kinds of people: Those who make things happen, those who watch things happen, and those who ask, ‘What happened?’”

- Casey Stengel, baseball Hall of Famer and world-class manager

Amid great individual valor, the competent and resolute leadership demonstrated by world leaders in times of war played a critical role in uniting and inspiring people to a common purpose and in harnessing the inner strength and abilities people needed to withstand and fend off the ravages of war.

Threats to nations and the welfare of people extend beyond national security to the vitality of financial markets and economies. Leadership on this front is critical for nations to successfully battle the ravages of unemployment, underemployment, economic malaise and income disparity.

In this vein, Franklin Delano Roosevelt on March 4, 1933, in his first inaugural address spoke passionately and with determination about how he intended to lead the U.S. out of the Great Depression. The tenor of his words would be refreshing if today’s “leaders” were to utter them with the same passion that Roosevelt did:

“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 vigor and verve with which Franklin Delano fought the Depression today is sorely lacking in Washington, which through its self-aggrandizing and ignorance spits with contempt at fires that rage across the U.S. economic landscape, leading Americans to feel anxious and helpless. This anxiety is present throughout the world, which perceives U.S. leadership to be adrift and intensely polarized. The same goes for European leaders.

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).

Probably the most disturbing development this past summer was the demoralizing manner in which Washington handled the battle over the debt ceiling. The battle exposed deep and seemingly irreparable rifts between politicians and it cast the U.S. as a rudderless, lost ship struggling to stay afloat amid waves of challenges that are sure to intensify owing to today’s flawed economic policy prescriptions and growing demographic challenges.

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?

Ben Bernanke: The Sultan of Swat
Pinch-hitting and in the batter’s box left empty by today’s leadership is Ben Bernanke, the veritable Sultan of Swat. From the very beginning of the financial crisis, Bernanke has been unflinching and audacious, never compromising, going to bat for the American people even under great criticism. Where political leaders have failed Bernanke has succeeded in providing continuous leadership at a time of crisis.

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. 

More Policy Actions, Even at the Zero-Bound
In light of the limited risks posed to inflation by the swath of idle bank reserves as well as interest rate levels that today are as low octane fuel, it has been better that the Bernanke Fed acted than not. In this vein, Teddy Roosevelt, the 26th U.S. president, said,

“In any moment of decision, the best thing you can do is the right thing. The worst thing you can do is nothing.”

The last thing that can be said about Ben Bernanke is that he is doing nothing. In fact, what is both remarkable and instructive for the outlook for monetary policy is how active the Fed remains even though it has reached the zero-bound for interest rates. We today find ourselves contemplating a long list of potential Fed actions, ranging from several variations of QEIII to an abundance of communications strategies, including the potential for targets on inflation, growth, and/or employment, or perhaps guidance related to the size of the Fed’s balance sheet.

The image of an activist Fed was made clearer to me when I spoke at an event at the Cleveland Clinic at the end of September, an event that Ben Bernanke also spoke at. It’s not every day that my name and the Fed chairman’s is on the same agenda, so it was quite an honor. Bernanke spoke to standing room only, with television monitors out in the hallway. Upwards of 800 or so were in attendance.

Bernanke was introduced by Cleveland Fed President Sandra Pianalto, who spoke elegantly and with glowing praise for the Chairman. It is known about the Fed that it is a very collegial institution, and Pianalto cast this image. Bernanke all the while stayed behind the vast, rectangular stage as she spoke. When Pianalto finished her introductory remarks, I (and I am sure others) grew with anticipation of the Chairman’s arrival onto the stage. There was a delay, however, that was quite telling. Pianalto directed the audience to a short video about Bernanke, which portrayed the Chairman as a leader and activist – a decider with extraordinary expertise and acumen fit for the task, a man who is bold and creative, and whose raison d’être is to design and implement solutions to fend off the ravages of the current era of deleveraging and thereby better the lives of the American people.

Efforts by the Federal Reserve to project an image of its continued activism are likely to remain prominent while interest rates are at the zero-bound. The last thing the Fed wants is to be seen as impotent and unable to provide any additional support for the U.S. economy and its financial system – it would erode confidence.

At the very least, amid a leadership void in Washington and in much of the debt-laden developed world, it can be said that the unwavering and laser-like focus of Ben Bernanke has provided continuity of leadership at a time it is sorely needed.

It is Ben Bernanke’s finest hour.   

The Author

Tony Crescenzi

Portfolio Manager, Market Strategist

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This material contains the current opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.