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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George Selgin wrote an interesting piece called End the Fed? A not-so-crazy idea. It does sound a little bonkers to me. Selgin thinks it might be a good idea to return to a totally privatized banking system, and he gives some historical data to back-up the argument. Still, his examples come from over fifty years ago when–really–people knew less about how money and a national economy are interdependent. Of course the Fed has made mistakes, but I would argue that–as time goes by–US Central Bankers are better and better prepared to do their job well.
Even more frightening, and a more realistic possibility, is that Congress will succeed in taking some control over Fed policy. That would be a disaster. One easy argument–compare congressional policy over the last fifty years with Fed policy. The Fed’s independence has allowed them–mostly–to follow money policy that encourages growth and discourages inflation. To put them under the control of Congress puts them under the control of big business.