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In defense of Ben Bernanke and the Fed

By E.J. Dionne

Federal Reserve Chairman Ben Bernanke is getting a lot of grief from abroad for his decision to buy an additional $600 billion of long-term Treasury securities as a way of stimulating the American economy. Bernanke is right, and his critics are wrong. It's just too bad our current politics don't allow Congress to do this the right way by injecting more fiscal stimulus into the economy.

Don't believe me on this. Check out an excellent column this morning by the Financial Times' Martin Wolf, a shrewd and thoroughly middle-of-the-road economic commentator. The headline says it all -- "The Fed is right to turn on the tap" -- but it's worth reading his careful reply to Bernanke's critics in its entirety. (And while I am praising economics writers, Steve Pearlstein is dead-on today in urging President Obama to focus his energies on rebuilding the industrial Midwest.)

In particular, the Chinese government, the world's greatest currency manipulator, has no grounds on which to accuse Bernanke of engaging in the sin it has turned into an art form. As The Post correctly editorialized this morning, the "mere fact" that both China and Germany "stand to lose from a cheaper dollar doesn't mean it's inherently bad policy. To compare the Fed's easy-money policy with China's systematic refusal, for years, to permit its currency to rise - or even to let it trade freely on international markets - is hyperbolic, to say the least."

In truth, Congressional action would be better than action by the Fed, and Congress should have passed a strong additional stimulus long ago. The House passed such a plan, but the Senate pared it back to what, in the current circumstances, amounted to a pittance. And in the wake of the election, the politics of additional stimulus spending are impossible. The right policy would be large additional stimulus spending now, coupled with a long-term plan for fiscal balance. But Republicans are pledged to block any tax increases that a sensible fiscal policy would require. You wonder if anything -- the reality of our situation, perhaps? -- will ever persuade them to change their minds.

Bernanke has to live in the world as it is. This may not be a perfect response to our economy's sluggishness, but it's far better than doing nothing. And I'm glad we have a Fed chairman who takes the history of the Great Depression and our currently high rate of unemployment seriously.

By E.J. Dionne  | November 10, 2010; 10:46 AM ET
Categories:  Dionne  | Tags:  E.J. Dionne  
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Comments

For some reason, I do not believe a word Dionne says.

Posted by: annnort | November 10, 2010 11:27 AM | Report abuse

Actually, Dionne, doing nothing would be far better. Remember the financial crash of 1920? It lasted about a year because the Government took a hands off approach. Remember what happened less than 10 years later? The Government stepped in, doing pretty much what we are doing now, and we had a depressed economy untill 1946.

Doing nothing = 1 year recession
Government solutions = 16 year depression

Posted by: BradG | November 10, 2010 11:37 AM | Report abuse

I somehow doubt that a few dozen basis points on the 10-year is all that is holding back businesses from hiring. IMO, it is a last gasp attempt to try and support the housing market, which is destined to fail as housing is still overpriced compared to historical norms.

Don't forget, if the Fed loses money on this transaction, those losses get passed through to the taxpayer as a line item on the budget. If the Fed plays the role as greatest fool in the bond market and then takes a hit as rates back up 100 basis points, they will lose about $50 billion on that trade, which the taxpayers will pay.

IMO, the Fed is playing with fire. All they seem to be doing is inflating a commodity bubble. If the "wage" side of the wage / price spiral doesn't increase (and who in their right mind envisions upward pressure on wages these days?) then all this will do is further decrease disposable incomes and act like a tax and weaken the economy further.

Posted by: sold2u | November 10, 2010 12:08 PM | Report abuse

Hi BradG,

Sorry, but correlation does not equal causation, particularly when you are looking at only a single variable. Your formula should have been:

Length of recession = government_action*x1 + FACTORA*x2 + FACTORB*x3 + ... + FACTORZ*x26

Where government_action can equal 0 for doing nothing.

That's presented as a statistical analysis, which, although no economist, I am pretty sure has been undertaken several times by scholars of recession (such as Bernanke).

There are many factors at play in determining recession length. Government action (which can vary greatly) is but one of them.

Big problems require careful thought and well-crafted solutions, not slogans that fit nicely on a bumper sticker. Reality is unfortunately messy and complicated.

Posted by: lde2c | November 10, 2010 12:22 PM | Report abuse

@Ide2c

I'd agree with you if that was the only two pieces things we were looking at.

Since this county was founded we have had a recession every 8-12 years. It's very regular. Pretty much every single one before the Great Depression was somewhat steep but short. So short that people don't even realize now that they happened.

I used the crash of 1920 because it was very similar at the start to the 1929 crash. Also, Hoover's reasoning in his actions were to fix the issues that he saw with how the 1920 one was handled. FDR then doubled down on Hoover's policies.

Since then we have continued to have recessions every 8-12 years. Government interference hasn't prevented or softened those recessions. In many case they have been worse than they should have been because the Government actively prevents the economy from righting itself.

So, we have had 80+ years of policies that haven't fixed a single thing AND have turned us from the worlds largest creditor nation to the world's largest debtor nation.

And the Government want's to continue following these same procedures that haven't done any good and have done much harm.

If you want a more recent example, look at Japan in the 1990's. We are following thier monetary policy to the letter and they still haven't recovered. But we expect to take the same actions and get different results? That's just insanity.

Posted by: BradG | November 10, 2010 12:53 PM | Report abuse

This is a keeper.
I'll quote Dionne back to himself next year.

Posted by: happyacres | November 10, 2010 1:48 PM | Report abuse

Hi Brad,

Perhaps you're right, that government action hasn't stopped any of the cyclical recessions, and that government policy does harm. I am sure there are economists who would agree.

I don't see that, however. While I agree we have become a debtor nation, and this is bad, I think this has more to do with general economic policy in the country and societal preferences, which are aimed at consuming rather than saving and creating. I don't think our indebtedness has as much to do with crisis response.

However, the current recession and the one beginning in 1929 were different from those other two in terms of scale, whereas the more regularly recurring ones are more part of the business cycle.

I have yet to read an opinion by an Economist who said we shouldn't have done anything in the face of this current recession. Most economists seem to agree that the actions taken by this and the former administration helped avert a much larger crisis, although there is disagreement on size and details. Indeed, Paul Krugman (you might not agree with his politics, but he certainly knows economics) points out that we are going Japan-style because we have been too timid on stimulating the economy, not because we tried to prevent things from happening.

Anyway, I believe that we would have been in far worse straits had we let things correct themselves, and that the beating incumbents took just now would have seemed like a massage if they had chosen to stand by and let the crisis run its course rather than intervene.

Right, that's my 2 cents. Thanks for the civil back and forth--a refreshing change from what one usually sees in the comments section.

Posted by: lde2c | November 10, 2010 1:56 PM | Report abuse

The Chinese are very good at making accusations without grounds. Just as they are at convicting people without evidence or even a law they have violated.

Posted by: Capn0ok | November 10, 2010 3:05 PM | Report abuse

So, EJ, guess you're up for another Wall Street Bailout.

Posted by: drowningpuppies | November 10, 2010 5:45 PM | Report abuse

There are two mechanisms to deal with the deficit and recession, and the first requires the second.

The first, as most perceptive people already agree, is a strong fiscal stimulus. The exiting Congress still has a few weeks left and it would be good if they earned their paychecks. What they could do is hand Obama a 4 trillion dollar check, to be spent over the next two years on infrastructure, investments and the like. Exact projects to be chosen at Obama’s discretion.

That gets the economy moving, but also requires a credible deficit reduction mechanism.

The deficit reduction mechanism that both parties can vote for is autobalance.

Autobalance automatically adjusts tax rates based upon an agreed percentage the previous years deficit or surplus. For example, if the agreed percentage was 10% and the deficit was 20% of total outlays, taxes would go up 10% of 20%. The same mechanism would reduce surpluses.

The advantages are: 1) A continual whittling of surplus and deficit, thus providing certainty to the markets. 2) It makes clear that tax rates are controlled by spending and thus the discussion moves from what tax rates shall we set to what spending shall we agree upon. 3) Failsafes can be included so that tax rates do not go up unless growth is robust. 4) By only using a percentage, large jumps in tax rates are avoided 5) It solves the problem forever . The list goes on.

Avraam Jack Dectis

Posted by: avraamjack | November 10, 2010 9:20 PM | Report abuse


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Posted by: alvindrew11 | November 11, 2010 4:52 AM | Report abuse

I believe Mr. Dionne is exactly right because Mr. Bernanke doesn't have a choice. The Chinese absolutely refuse to revalue their currency upward. Congress is a joke, unwilling and unable to do anything that might move us off dead center.

So, Bernanke is using the only tool he has, QE2. He devalues the dollar making those trillions in reserve currency the Chinese hold worth less every day. I'm guessing things are much worse than anybody is admitting and since he is the only person in our government who actually has the power to do something, he is not sitting on his hands like a lot of Congressmen.

In a year or two, Bernanke will either look like a genius or the dumbest guy on the planet.

Posted by: Hoofinmouth | November 13, 2010 10:46 AM | Report abuse

If you read this article carefully you can see Dionne wants what all liberals desire, more government spending and higher taxes. I don't think he really cares about what Bernanke has done as long as there is massive government spending and much higher taxes.

Posted by: g30rg3544 | November 13, 2010 12:24 PM | Report abuse

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