Pity Bernanke and his difficult task

Have you ever walked into a situation with a bit of confidence and swagger, and THEN found out how bad it really was? As someone who occasionally has these crisis situations in my job, I can tell you that I dread these times. Maybe I'd like to hide under a rock, or wish it hadn't been my shift that day, but I have a job with responsibilities and I'll damn well perform as well as I can.

So I have sympathy for what Bernanke inherited. His job is to clean up after the biggest financial disaster since the 1929 Wall Street crash. Yes, he also contributed to the problems, but that doesn't make the task less staggering. In fact, I'm nearly dumbfounded just contemplating how huge a task it is. Anyone who pretends they have the absolutely correct answer to this problem is an unmitigated egotist, and I wish I could give such people a withering stare that would instantly deflate such pomposity.

So Bernanke has to deal with an overextended banking system that has many questionable loans and debtors who are facing lower and uncertain income. Naturally, he wishes for a soft landing, but we're past the point where that's possible. Instead, we mostly hope to avoid a full-on crash where the banking system and all private employment just freeze up. That part of the mission was accomplished with the help of the TARP.

The clean-up remains, as does the rebuilding. This is still very tricky, because the banking system still has scads of questionable loans and not-so-solid debtors.

I think Bernanke's choice of quantitative easing might have been the right one. Our banking system was an overstretched balloon that became untethered, flew around spewing out (actually destroying) trillions of dollars of assets. Maybe to stabilize the banks you have to do some partial reinflation. A bank has a better chance if it receives 80 cents on the dollar than if it receives 40. The strong debtors, who are paying back in full, rather have values rise to that 80% level than stay in cellar.

So I don't really believe that Bernanke has been pouring trillions of new dollars into the economy. He's only been replacing some of the destroyed trillions. Is this really true? What are the consequences? Um, um, let me cogitate some more. Or maybe I should just be forthright and say that I don't know if it's the right course, but it looks sensible to me (for the reasons I stated), and I haven't heard any other positions that were stronger. We'll have to see how it works out. And, of course, PRAY.

simplystatedbusiness.com

The elusive argument of what the Fed should do

After reading in two separate posts that there are 'many actions' the Fed could take to help employment in this country, I decided to search for a listing of these actions. I'm surprised that I had to search, because one of the first tenets of argumentation is that you support your assertions. So when someone asserts that the Fed could help employment, in the next sentence or paragraph, they should explain how. Simple, right? Not too much to expect, I would have thought.

Well, the arguments for what the Fed could do were largely attributed to Paul Krugman, a Nobel laureate in economics, so it wasn't too hard to find. Nor is it too hard to understand Krugman's suggestions:

1. First of all, be bold and try actions other than the usual limited set of raising or lowering the Fed fund interest rates.
2. Buy longer term government bonds and government-backed mortgage securities. (Krugman reports that the Fed is currently doing this.)
3. Change the inflation target from 2% to 4%, signally that the Fed will continue pumping money until there's enough growth to start having significant inflation pressure.

Once the suggestions are enumerated, it becomes clear that there aren't 'many' actions. #1 isn't a specific action. #2 is already being done. So that leaves a single action--changing the inflation target.

With only one additional action being suggested, I would think our society or pundits could have a substantial debate. So what are the pros and cons, the risks of pursuing this course or not pursuing it?

• Pro, from Krugman: "If the Fed were to raise its target for inflation....it would help persuade investors and businesses alike that sitting on cash is a bad idea.
• Con, from the American Enterprise Institute: Inflation lowers the purchasing power of dollars, which mean higher prices for commodities like oil.

I believe the con argument, but the pro argument is less probable. I don't know if the investors who got so badly burned in 2008 will unleash their cash out of fear of inflation that hasn't appeared yet.

What I find strange is the lack of more discussion. Is this all there is? No more ideas for what the Fed could do? It's no wonder that the economy is rebounding so slowly. The Fed can't really do much more, the Congress and president can't agree on what to do, the rest of the world either has its own problems or they aren't looking to pump us up. So, no quick fix. How unAmerican!

Inflate your way to riches.

Photo: tootoo.com

Economist article with comments
St. Louis Fed comments
Background comments by Bernanke
Related argument on quantitative easy from AEI: The low interest rates force investors into riskier investments, like commodity speculation. Lovely.
Four specific suggestions with rationales from an economist. Many times better than Krugman, but more work to read.