Federal Reserve Chief Says Monetary Stimulus Worked

Ben Bernanke insists that printing money has been “economically meaningful.”

Ben Bernanke attends a meeting of the Board of Governors of the Federal Reserve in Washington DC, August 7
Ben Bernanke attends a meeting of the Board of Governors of the Federal Reserve in Washington DC, August 7 (Talk Radio News/Lingjing Bao)

Since the start of the financial crisis in the summer of 2007, when the subprime mortgage market in the United States collapsed, the Federal Reserve has pumped some $1.9 trillion in the economy in an attempt to revive it.

Most of this money was created during the first round of quantitative easing since November 2008 when the Federal Reserve took over more than $1 trillion of the American banking sector’s mortgage exposure. The second round of quantitative easing saw the Fed purchase some $600 billion worth of United States Treasury bonds in order to reduce the country’s borrowing costs.

For all this printing of money, it can hardly be said that confidence in financial markets is restored. Unemployment — the American central bank is unique in that it has a mandate to promote full employment — hovers at 8 percent which is the same rate as when President Barack Obama took office. There’s no indication that the Federal Reserve’s monetary expansion has worked except for the ominous threat that “things could have been worse.”

Yet in Jackson Hole, Wyoming last Friday, Chairman Ben Bernanke declared his policy a success because “the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields.” He added, “These effects are economically meaningful.”

Indeed! In buying hundreds of billions of dollars worth of Treasury bonds, the central bank has not only expanded the money supply well beyond what was reasonably required to keep pace with lackluster economic expansion; it has aggravated the United States’ debt crisis because the government could continue to borrow cheaply and freely to finance high deficit spending which it probably wouldn’t have been able to do without the Fed’s help.

federal government deficits have averaged $1.4 trillion for the last four years. A $900 billion shortfall is projected for 2013. The national debt has increased by more than $6 trillion since 2008. All the same, the Federal Reserve chief urged lawmakers to “take care to avoid a sharp near term fiscal contraction that could endanger the recovery.”

At the symposium in Jackson Hole, sponsored by the Federal Reserve Bank of Kansas City, Bernanke also claimed that asset purchases by the Federal Reserve enabled the creation of more than two million jobs although he admitted that such estimates “should be treated with caution.”

It is likely that the crisis and the recession have attenuated some of the normal transmission channels of monetary policy relative to what is assumed in the models.

Except it’s not so much the recession as the Federal Reserve itself that has disrupted the “normal transmission channels of monetary policy” by creating nearly $2 trillion out of thin air.

Nevertheless, Bernanke is confident “that central bank securities purchases have provided meaningful support to the economic recovery.” He just can’t tell you how.

The central banker rejected as utterly “unjustified” a reduction in the public’s confidence in the Fed’s ability “to exit smoothly from its accommodative policies at the appropriate time.” In layman’s terms, people are worried that the Federal Reserve’s balance sheet has grown so much in so few years (it has tripled since 2007) but Bernanke knows that he can always inflate the problem away by printing more money. Even as he pointed out as “noteworthy” that “the expansion of the balance sheet to date has not materially affected inflation expectations.” A monetary policy Catch 22 if I ever saw one.

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