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Some ideas are just too stupid to not comment on. Hyping $Ben Bernanke as
an inflation fighter is one of those ideas. It's not just one person who lost
his mind either. Both Tom Schlesinger, executive director of the Financial
Markets Center, and Mark Zandi Economy.com chief economist have simultaneously
gone off the deep end in proposing that "Helicopter Drop" Bernanke is an "inflation
fighter". That absurd idea was proposed in a CNN Money article about who will
replace Greenspan as next FED chairman entitled Favorites
pull ahead in Fed derby. Let's take a look:
Glenn Hubbard, the former chairman of the CEA who is now teaching at Columbia,
is also frequently mentioned as a strong candidate and viewed as less of
an inflation hawk than Bernanke. Bernanke is seen as the long-time champion
of explicitly pegging Fed interest rate moves to the rate of inflation.
"I would be nervous about picking an inflation-targeting champion as my
next Fed chairman given the potential impact on employment growth," said
Tom Schlesinger, executive director of the Financial Markets Center.
"No matter who is Fed chairman, they're going to inflation target either
explicitly like Bernanke wants to do or implicitly," said Zandi. "Someone
without his inflation-fighting credentials might have to do more to win the
markets' trust of their inflation-fighting credentials."
That comment by Zandi is so stupid I just have to repeat it:
"Someone without his inflation-fighting credentials might have to do more
to win the markets' trust of their inflation-fighting credentials."
Anyone that thinks Bernanke is an "inflation fighter" must not have read Bernanke's
most famous speech Deflation:
Making Sure "It" Doesn't Happen Here Following are some "choice" snips
from that famous speech:
I am confident that the Fed would take whatever means necessary to prevent
significant deflation in the United States and, moreover, that the U.S. central
bank, in cooperation with other parts of the government as needed, has sufficient
policy instruments to ensure that any deflation that might occur would be
both mild and brief.
Of course, we must take care lest confidence become over-confidence. Deflationary
episodes are rare, and generalization about them is difficult.
Preventing Deflation
First, the Fed should try to preserve a buffer zone for the inflation rate,
that is, during normal times it should not try to push inflation down all
the way to zero.
Second, the Fed should take most seriously--as of course it does--its responsibility
to ensure financial stability in the economy. Irving Fisher (1933) was perhaps
the first economist to emphasize the potential connections between violent
financial crises, which lead to "fire sales" of assets and falling asset
prices, with general declines in aggregate demand and the price level. A
healthy, well capitalized banking system and smoothly functioning capital
markets are an important line of defense against deflationary shocks. The
Fed should and does use its regulatory and supervisory powers to ensure that
the financial system will remain resilient if financial conditions change
rapidly. And at times of extreme threat to financial stability, the Federal
Reserve stands ready to use the discount window and other tools to protect
the financial system, as it did during the 1987 stock market crash and the
September 11, 2001, terrorist attacks.
Third, as suggested by a number of studies, when inflation is already low
and the fundamentals of the economy suddenly deteriorate, the central bank
should act more preemptively and more aggressively than usual in cutting
rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne
et al., 2002). By moving decisively and early, the Fed may be able to prevent
the economy from slipping into deflation, with the special problems that
entails.
As I have indicated, I believe that the combination of strong economic fundamentals
and policymakers that are attentive to downside as well as upside risks to
inflation make significant deflation in the United States in the foreseeable
future quite unlikely. But suppose that, despite all precautions, deflation
were to take hold in the U.S. economy and, moreover, that the Fed's policy
instrument--the federal funds rate--were to fall to zero. What then? In the
remainder of my talk I will discuss some possible options for stopping a
deflation once it has gotten under way.
As I have stressed already, prevention of deflation remains preferable to
having to cure it. If we do fall into deflation, however, we can take comfort
that the logic of the printing press example must assert itself, and sufficient
injections of money will ultimately always reverse a deflation.
So what then might the Fed do if its target interest rate, the overnight
federal funds rate, fell to zero? One relatively straightforward extension
of current procedures would be to try to stimulate spending by lowering rates
further out along the Treasury term structure--that is, rates on government
bonds of longer maturities.9 There are at least two ways of bringing down
longer-term rates, which are complementary and could be employed separately
or in combination. One approach, similar to an action taken in the past couple
of years by the Bank of Japan, would be for the Fed to commit to holding
the overnight rate at zero for some specified period. Because long-term interest
rates represent averages of current and expected future short-term rates,
plus a term premium, a commitment to keep short-term rates at zero for some
time--if it were credible--would induce a decline in longer-term rates. A
more direct method, which I personally prefer, would be for the Fed to begin
announcing explicit ceilings for yields on longer-maturity Treasury debt
(say, bonds maturing within the next two years). The Fed could enforce these
interest-rate ceilings by committing to make unlimited purchases of securities
up to two years from maturity at prices consistent with the targeted yields.
If this program were successful, not only would yields on medium-term Treasury
securities fall, but (because of links operating through expectations of
future interest rates) yields on longer-term public and private debt (such
as mortgages) would likely fall as well.
The Fed can inject money into the economy in still other ways. For example,
the Fed has the authority to buy foreign government debt, as well as domestic
government debt. Potentially, this class of assets offers huge scope for
Fed operations, as the quantity of foreign assets eligible for purchase by
the Fed is several times the stock of U.S. government debt.
Like gold, U.S. dollars have value only to the extent that they are strictly
limited in supply. But the U.S. government has a technology, called a printing
press (or, today, its electronic equivalent), that allows it to produce as
many U.S. dollars as it wishes at essentially no cost. By increasing the
number of U.S. dollars in circulation, or even by credibly threatening to
do so, the U.S. government can also reduce the value of a dollar in terms
of goods and services, which is equivalent to raising the prices in dollars
of those goods and services. We conclude that, under a paper-money system,
a determined government can always generate higher spending and hence positive
inflation.
Conclusion
I hope to have persuaded you that the Federal Reserve and other economic
policymakers would be far from helpless in the face of deflation, even
should the federal funds rate hit its zero bound.
Mish, that article was from 2002 do you have anything more current?
Well that's a good question but if I critiqued every silly thing Bernanke
has said since 2002 we just might be here for a while. That said, enquiring
Mish readers deserve answers so let's look at a couple of recent articles about
Bernanke.
In The Fed's Wild Imagination Kurt
Richebächer takes apart Greenspan's and Bernanke's views on the "global
savings glut" theory.
In his testimony to Congress on July 20, 2005, Mr. Greenspan declared it
quite likely that the world is currently experiencing a global savings glut.
Agreeing with Ben Bernanke, he mentioned this glut as one of the factors
behind the so-called interest conundrum, i.e., declining long-term rates
despite rising short-term rates.
Having read a lot from the Fed's luminaries, their inability to distinguish
between rampant global credit excess and a global savings glut does not surprise
us. In this view, the Federal Reserve has come to the rescue of a world where
excessive saving is threatening depression by eliminating savings.
Attracted by superior rates of return on U.S. assets, investors around the
world have been scrambling to pour their excessive savings into direct investments,
stocks, bonds and real estate in the United States, in this way financing
the resulting huge U.S. trade deficit.
While this explanation may seem to make sense, there is one big snag: Not
one word of it is true. First of all, in reality, private foreign investors
have drastically curbed their investments in the United States. According
to the Bank for International Settlement - the international organization
of the world's central banks - Asian central banks financed 75% of the U.S.
current account deficit in 2004.
First, private capital flows into the United States have slumped. Without
the massive interventions by the Asian central banks, the dollar would have
collapsed long ago.
Second, the dollars with which these central banks have been buying U.S.
Treasury and agency bonds have definitely nothing to do with Asian savings.
Evidently, the central banks are recycling the dollars, no more, no less,
which they receive from U.S. trade and capital flows. These dollars have
come into the central banks' possession through their interventions in the
currency markets, to prevent a rise of their currencies against the dollar.
To speak of a global savings glut as a possible cause of the surprisingly
low U.S. long rates in the face of these blatant facts is truly the height
of insolence and absurdity. That this opinion comes from the leading figures
of the Federal Reserve is more than shocking.
Here is what Bernanke was saying on Tuesday, Oct 11, 2005 as reported by Reuters
in More
Asia FX flexiblity needed.
White House economic adviser Ben Bernanke said on Tuesday greater currency
flexibility in Asia and stronger economic growth among U.S. trading partners
were needed to help reduce global trade imbalances.
He also told the group that while energy prices were pushing up U.S. inflation,
it did not appear they were having much of a spillover impact on so-called
core prices.
Anyone that thinks that a higher RMB is going to solve US's trade gap with
China is point blank nuts. For starters it would push up the price of goods
coming from China, thereby causing inflation. Secondly, at 20-1 wage differentials
between China and the US it will not bring back jobs to the US or by itself
restore trade balance either. For the record, I actually agree with Bernanke
that energy prices are not having too much of a spillover effect on the economy,
but that certainly is not the view of inflation fighting hawks.
Two dark horse candidates in the race to replace Greenspan are said to be
current fed governors Roger Ferguson and Donald Kohn according to this article
entitled Greenspan
Chooses a Successor.
Both are highly skeptical of Bush's tax cuts, despite the strong economic
recovery the cuts have spurred. Both could be expected to continue raising
interest rates, in part to punish the president for not raising taxes and
failing, in their view, to pay enough attention to the budget deficit. Their
likely idea of a tacit deal next year with the White House: You raise taxes,
we'll stop boosting rates.
If that is true, does anyone think this president would appoint either of
them?
Martin Feldstein, the president of the National Bureau of Economic Research,
is seen as an almost co-favorite with Bernanke but given Feldstein's position
as a director of the scandal plagued American International Group, as well
as his likely political independence as compared to Bernanke, the choice may
be a foregone conclusion.
There you have it folks, $Ben Bernanke IFE "Inflation Fighter Extraordinaire" is
the odds on next Fed Chairman simply because he will likely be the loosey-goosey
free for all Bush suck up this administration wants and no other candidate
has those exact qualifications. I hope I am wrong. If I am wrong, it will not
be either the first or the last time. If I am right, please remember this:
$Ben is gold's best friend.
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