U.S. Federal Reserve Chairman Ben Bernanke is scheduled to testify before the Senate Banking Committee today, and this report gives a helpful glimpse at the difficulties he faces.
We learned in the 1970’s, when OPEC first managed to raise oil prices, about the double-edged sword of stagflation. Oil has become such a strong supply side influence that it can cause both inflation and slow economic growth.
Bernanke wants to maintain the Fed’s 600 million stimulus package to battle low growth rates and unemployment that is still around 9% in the U.S. The problem is that many Americans–and many in Congress–are afraid of inflation and the large public debt in the states.
It is a dilemma, but with inflation at only 0.8% over the last year, I agree that Bernanke is emphasizing the correct problem, despite higher oil prices. The time to fight inflation and deficits is when we see strong growth.
On the other hand, perhaps the American economy has reached income levels where more growth should not be emphasized.
This article claims that Ben Bernanke has probably been reappointed chairman of the Federal Reserve. However, the article’s real topic–the real argument–is that Bernanke and the Fed. are the most likely source of meaningful help for the economic downturn.
As my students will recognize, this is a very monetarist argument, dependent finally on the Quantity Theory of Money, where money supplies are the final determinant of production.
Another perspective (Keynesian) might argue that monetary policy is ineffective if people are unwilling to borrow even at low interest rates. The following bit suggests that the Fed. recognizes this as a problem, but not much of an argument that these problems can be overcome.
He has ordered the Fed’s bank examiners to muscle banks into boosting their lending. This often requires an examiner to tell a bank that it should value a property used as collateral higher than it may want to. The Fed is also reviving the market for the bundling of loans for small businesses. And it is bending the arms of potential investors to put more capital into banks to increase credit.
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A good editorial here about monetary policy, focused on the Federal Reserve and how it has dealt with the recession. Some valid criticisms here–rewards for the “imprudent financial firms at the expense of their more prudent rivals,” and a recent policy reversal that is poorly timed.
Then the amusing bit, critiqueing Bernanke’s claim that the recession was nearly over.
One doesn’t usually turn to old TV shows for economic insights. Yet the best way to put the Fed’s role in the recent crisis in perspective is by recalling an episode of “The Beverly Hillbillies” – the one in which Granny convinces everyone that a spoonful of her medicine can cure the common cold. Sure enough, it can: It just takes between a week and 10 days.
I like the mataphor. The message–of course–is that recessions are self-curing too, and Bernanke and money policy do not deserve credit for a recovery.
He may as well have been responding to my last post. Fed Chairmand Bernanke said yesterday that he does not expect nationalization of banks in the US. That spurred some optimism and demand for stocks, and the Dow Jones rose by 3% even though Bernanke also said the recession is likely to last at least another year.
Another report says that home prices in the US have taken another drop and consumer confidence is lower too. Bernanke was probably taking this into consideration when predicting the extended recession.
Question then–Which would have a more positive effect on the housing market? Banks being held privately? Or under government control?
Held privately, banks are less restricted but also have the option to hoard money. Held publicly, policy makers could push the banks to loan money, but the cost of banking would likely be higher.