Bernanke should heed his own advicePublished 11:00pm Wednesday, June 13, 2012
Ben Bernanke, the chairman of the Federal Reserve, was on Capitol Hill last week to testify before Congress. In addition to providing an update on the state of the U.S. economy, Mr. Bernanke urged Congress to get America’s fiscal house in order; doing so, according to Mr. Bernanke, involves reducing our federal deficits and working out a deal on the soon-to-expire George W. Bush tax rates.
While Congress and many of our recent presidents deserve criticism for making a mess of our fiscal house, it’s ironic to see criticism coming from Mr. Bernanke. Mr. Bernanke is viewed by some economists and politicians as incompetent and by others as either meddlesome or overly diffident to the current government, so he should be careful when throwing stones at Congress.
For three-and-a-half years now, the Fed, under Bernanke’s guidance, has embraced a “near zero” interest rate policy, and they intend to keep interest rates near zero through the end of 2014. Right now, Fed officials are considering a third “quantitative easing” program (QE3), which is technical jargon for printing large quantities of money to buy assets the Fed doesn’t normally buy; many financial experts speculate the new program will focus on mortgage securities. However, as a result of Bernanke’s first two attempts at quantitative easing, the money supply in the U.S. has expanded greatly since 2008, and we should question what all of the new money has bought us, beyond a devalued currency.
Our economy’s recovery has been slow, unemployment remains high, and business leaders remain quite pessimistic about America’s future growth prospects. To a large extent, the recovery has been concentrated in the energy industry, thanks to the oil and natural gas boom taking place in Texas and the Great Plains. Construction, the financial industry, and housing—the three sectors the Fed has sought to help first and foremost—remain stagnant.
Thanks to Bernanke’s Fed and new laws like Dodd-Frank, banking is arguably the most regulated sector of the economy today. According to lenders, regulation and policy uncertainty are the two main obstacles blocking more transactions from taking place, which is a drag on the speed with which businesses can expand and hire more workers. Individuals who save or live on fixed incomes are being forced to take on more risk in order to manage their money because interest rates on deposits are anemic and real rates of return on traditional savings are negative.
While some people think Bernanke and the Fed saved the U.S. from a complete financial meltdown in 2008, many economists disagree. Rather than save us, the Fed, through a policy of easy money and low interest rates throughout the early 2000s, played a primary role in creating the 2008 financial crisis. Their actions since the crisis have prolonged our slow, stagnant recovery and created a tremendous amount of uncertainty in markets. For example, individuals are asking themselves the following: why refinance a mortgage or buy a home now when QE3 might mean it can be financed at a lower cost in the future?
Under Ben Bernanke, the Fed has stretched beyond its mission and, in so doing, has done more long-term harm to markets than good. As Fed Chairman, Bernanke has been afraid to give the U.S. economy a chance to self-correct. Instead, he has propped up markets, with mixed success, through constant Federal Reserve meddling, and people have come to expect more and more rounds of intervention from the Fed. The damage he has done to our economy through constant meddling and the inflationary risks we face going forward are at least on par with the mess Congress has made of our fiscal house.
Yes, Congress should drastically lower government spending and should keep taxes low; government interference in the economy will not increase the productivity or efficiency of the private sector in the long-term, and that’s where wealth and thus jobs are created. But, we’d all be better served if Bernanke took some of his own advice and didn’t interfere further in the economy either.
Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.