Wednesday, July 25, 2012

How to be your own worst enemy

Ben Bernanke is his own worst enemy these days. He keeps insisting that the Fed is not out of ammunition and can do more to strengthen the economy, but to date, has not actually done anything "new" or "more".

Which leads to his ritual excoriation in the blogo/twitter-sphere.

And rightly so.

4 years on, we still have not reached pre-crisis employment levels.  High inflation is not on the immediate horizon, and growth and growth forecasts keep falling. If you can "do more", it's beyond time to walk the walk, not just talk the talk.

Ben Bernanke is an excellent economist and a smart man. So what is going on?

Continue reading below the fold

Let's break it down, "where the hell is Ben?" style:

Maybe BB doesn't really think the Fed can do more, but fears all hell will break loose if he admits it. This is plausible to me. More QE, even if it buys mortgage related securities is not likely to do much, nor is extending the guidance of how long short rates will be low into 2015 or beyond.  In fact, extending that commitment further into the future may actually delay peoples' decisions to spend or invest.

Maybe BB thinks the Fed really can do more, but the political cost isn't worth the modest economic benefit. Also plausible, but not the bravest of positions. BB is a lame duck. He's not getting re-appointed again no matter what happens, so why not let it all hang out?

Maybe BB thinks the Fed really can do more, but is worried about fallout from initiating a new policy so close to the election. In the past, conventional wisdom was that the Fed tried to avoid any actions that looked to be electorally inspired (obviously, one quick look at my vita will show that I don't agree with the conventional wisdom). Maybe he wants to see a different occupant in the White House and is delaying.

No matter what the reason, BB is really causing a problem for himself and his organization by insisting that the Fed can make things better (without spelling out exactly how) but refusing to take action (without spelling out exactly why).

I do not believe the Fed can quickly lower unemployment to 6.5% or anything near that. I do not believe that the Fed can quickly put us on a path to 4% growth.

I do think that more QE will help a bit and that BB should get on with it.