In a speech to the Economic Club of Indiana, Federal Reserve chairman Ben Bernanke delivered what the Washington Post described as ??? his most aggressive response yet to critics of quantitative easing, the Fed???s policy of buying up long-term assets to stimulate the economy.???
The Associated Press offers a summary of this aggressive defense:
The Fed needs to drive down borrowing rates because the economy isn’t growing fast enough to reduce high unemployment, Bernanke said in a speech to the Economic Club of Indiana. The unemployment rate is 8.1 percent.
Low rates could also help shrink the federal budget deficit by easing the government’s borrowing costs and generating tax revenue from stronger growth, Bernanke argued.
The chairman cautioned Congress against adopting a law that would allow it to review the Fed’s interest-rate policy discussions. The House has passed legislation to give Congress’ investigative arm broader authority to audit the Fed, including reviewing its interest-rate policymaking. The Senate hasn’t adopted the bill.
Bernanke warned that such a step would improperly inject political pressure into the Fed’s private deliberations and make officials less likely to act.
This argument about saving the Fed from ???politicization??? is made whenever the topic of congressional oversight is broached. Some of Bernanke???s argument sounds self-refuting. If the Fed???s monetary policy is now the only thing saving us from even worse unemployment, how can we continue to treat it as an inscrutable ???black box??? forever insulated from the people and their representatives? We???re being told that an awfully large component of our economic engine cannot be opened by the end users, without voiding the warranty.
As for Bernanke???s argument about low interest rates keeping the deficit down, the thing to remember is that he???s on the verge of losing control over those interest rates, precisely because the world???s investors (and the credit rating agencies they respect) have grown tired of watching American monetary policy used as a straitjacket to contain our insane spending habits. This little game of having the U.S. government buy up its own debt ??? which President Obama absurdly mischaracterized as nice middle-class folks happily buying up bonds, during his horrific recent appearance on the David Letterman show ??? has very nearly reached the breaking point. There really will come a moment, very soon now, where further borrowing to sustain our New Normal of trillion-dollar annual deficits will become impossible, no matter how aggressive Ben Bernanke happens to be feeling.
CNN recently ran a report looking at the ???fear of new currency wars??? prompted by QE3, noting that investors are developing a preference for currencies which are not subject to an excess of central-bank manipulation. One reason the dollar???s image hasn???t been tarnished more by QE3 is that Europe is in such bad shape at the moment??? which means Bernanke???s strategy is partially dependent upon the misfortune of others. Continued American currency manipulation could increase the risk of the dollar losing its incredibly valuable position as the preferred currency of crucial international markets. It???s a long-term risk, but the results would be absolutely catastrophic.
A quote from Bernanke???s speech in the Washington Post gives a disturbing sense of a man watching his fiscal ship plunge down a whirlpool of inescapable circular reasoning:
The responsibility for fiscal policy lies squarely with the administration and the Congress. At the Federal Reserve, we implement policy to promote maximum employment and price stability, as the law under which we operate requires. Using monetary policy to try to influence the political debate on the budget would be highly inappropriate.???
For what it???s worth, I think the strategy would also likely be ineffective: Suppose, notwithstanding our legal mandate, the Federal Reserve were to raise interest rates for the purpose of making it more expensive for the government to borrow. Such an action would substantially increase the deficit, not only because of higher interest rates, but also because the weaker recovery that would result from premature monetary tightening would further widen the gap between spending and revenues.
So we???ve got to keep government borrowing cheap, because raising those rates would be devastating to the incredibly fragile Obama non-recovery; and cheap borrowing is one of the reasons our government feels free to keep racking up more debt.
This is a powerful argument against the kind of tax and regulatory policy that leads to weaksauce high-unemployment low-growth ???recoveries.??? If we had a more robust, energetic private sector shouldering less of a tax and regulatory burden, we wouldn???t have to spend so much time recuperating in our quantitative easy chair. Interest rates could be safely allowed to reach a more realistic, sustainable level. It all sounds a bit like the arguments put forth for keeping student loan rates at artificially low, heavily subsidized levels. Everyone is supposed to be grateful for those low rates, without examining how the flood of easy student loan money has led to absurd tuition inflation.
Bernanke insisted that his strategy does not amount to ???monetizing the debt,??? but instead consists of ???acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates.??? But there are growing signs that even Obama???s virtually undetectable ???recovery??? is over, and a new recession looms. That doesn???t bode well for the ???temporary??? basis of Quantitative Easing 3.
No doubt many of the factors Bernanke is responding to are beyond his personal control. He doesn???t write federal budgets??? well, nobody does that any more, but that isn???t the Fed Chairman???s fault. But his operation is, by his own accounting, increasingly crucial as a cushion for the failures of Big Government micro-management. That makes it harder to insist it should exist completely outside the system it has been tasked with supporting, or perhaps even propping up.