“Mr. President, I told you I would.”
By: David A. Smith
“Ben! What are you doing about the economy? “
“Mr. President, I’m doing what I told you I would.”
– not overheard on a non-wiretapped line

“You can’t accuse me of inconsistency.”
You have to forgive Politico for seeing only the politics of the most recent not-rainy-enough pronunciamento from Ben Bernanke, and hence missing the larger significance:
Bernanke dashes Dem hopes
By: Ben White
August 27, 2010

Voters? Voters?!?
I can answer that – he’s waiting for the economy to strengthen itself enough that he can raise interest rates. But the economy is still far too weak for that, at least as long as the Chinese and others keep buying our debt and propping up the dollar.
The job of Fed chairman is as close to truly apolitical as our system allows – the Fed’s constituency is the economy as a whole.
But the Federal Reserve chairman stopped far short of hitting the panic button and saying a double-dip recession was imminent. He did not pledge any immediate, dramatic steps to goose growth and suggested the bank’s remaining tools might not work very well anyway.
Chairman Bernanke is right. Interest rates are near zero, a deliberate strategy by the Fed to replenish bank capital (because the banks are making wide spreads between the low rate they are offering and the microscopic rates they have to pay).

“Mr. President, have pity on the little people.”
As I predicted in January, 2010:
By nature Chairman Bernanke is cautious. Yet like his predecessor Alan Greenspan, he is given to being clear now and then. Six months ago, he wrote that he intends to pursue an ‘exit strategy’ from the Fed’s intervention in the markets, and made plain that will mean raising interest rates:
Each of these policies would help to raise short-term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy.
Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period [written July, 2009, just before Mr. Bernanke's renomination – Ed.].
We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.
A model of clarity: Chairman Bernanke will push interest rates up and up as fast as he can without stalling the fragile economic recovery.

Once I’m safely confirmed, that is
The pace of his belt-tightening will depend on the outcome of our next prediction:
Mr. Bernanke’s problem is simple: the economy is too weak to allow him to push up interest rates at all, but he’ll be damned if he’ll make things worse.

But my press clippings are so good!
Printing money by itself, without an economic purpose, would delay the economy from clearing, worsening our budgetary and trade deficits with no meaningful increase in economic activity. Chairman Bernanke has already done as much as he can:
Traditionally, the nation’s central bank reduces its target for short-term interest rates to encourage lending and economic growth, but rates are already near zero, and the bank has pledged to keep them there for the foreseeable future.

“You want rates below zero, Madam Chair?”
In our excessively immediate age, we demand that any unpleasantness we experience be cured equally quickly, even when some things simply take time to mature – longer than the event horizon of officials who will be facing the voters in November, and who, desperately needing political capital, are clamoring for political vaporware.

Just assemble these pieces, and presto! Political capital

If you’re an incumbent, that is
“I don’t think we have a double-dip ahead, but we do have a very slow recovery right now,” said David Kotok, chief investment officer at Cumberland Advisors. “That means 1-2% growth, not 3-4% growth and a higher risk of heading closer to zero.”

Kotok’s conservative
The previous stimulus legislation having worked out so well, the country is in no mood for another large-scale spending package.
Even with Democrats in control of the White House and both houses of Congress, there’s no political will for a quick-start stimulus package.
So Democrats are largely dependent on the Federal Reserve to use the tools remaining at its disposal to boost growth. And Bernanke showed little short-term appetite for doing this.

“The longer they talk, the less I’ll have to say.”
“Broad financial conditions, including monetary policy, are supportive of growth, and banks appear to have become somewhat more willing to lend. … Importantly, households may have made more progress than we had earlier thought in repairing their balance sheets, allowing them more flexibility to increase their spending as conditions improve,” he said.
Translation: You broke the economy’s bones, that takes time to heal, and I’m not going to push excessive weight on it right now.

Stay off these for a while
While Bernanke sounded at least somewhat hopeful, his remarks came just hours after the Commerce Department substantially downgraded its estimate of second-quarter gross domestic product growth — to 1.6% from an initial reading of 2.4% — indicating the economy is close to slipping back into recession and underscoring Democrats’ political peril heading into the midterm elections.

Bad ratios, folks
The Fed’s toolbox also includes so-called “quantitative easing,” or using its balance sheet to purchase Treasury bills, as well as securities backed by mortgages and other assets in order to increase the flow of credit into the financial system.
This is basically printing money, and as I predicted in January, 2010:
Starting in September, 2008, Treasury bought GSE securities, in large volumes (over $1.425 trillion so far).

Aside from giving the global financial markets confidence that treasury was standing firmly behind Fannie and Freddie – confidence further buttressed by the year-end lifting of funding caps – it also had the secondary effect, a probably-intended consequence, of holding down interest rates by essentially printing money.
By March, Treasury will stop buying GSE securities.
Treasury did stop, and now some hope it will restart:
Some Federal Reserve officials had hoped to reduce the bank’s balance and to focus on keeping inflation in check.
Meaning, selling the treasuries it holds, taking money out of the supply, and starting to push up rates. But this tool, which Chairman Bernanke must be itching to use, has to remain idle for now:

“Interesting idea, Mr. President, but … No.”
“One risk of further balance sheet expansion arises from the fact that, lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions,” he said.
Translation: At some point the capital markets lose confidence in us, and we lose the ability to control our economy. I won’t risk that.

“The world’s largest economy requires special care.”
Absolutely none of this should be the slightest surprise to anyone who has read Chairman Bernanke’s comments, both after his confirmation and even before his renomination. In January of this year, I posted a multi-part series [Part 1, Part 2, Part 3, Part 4, and Part 5, Part 6, and Part 7 – Ed.] on the biggest invisible stories of the decade, including this one:
2009, August: President Obama’s reappointment of Ben Bernanke
Last August, in the middle of an otherwise sleepy summer haze, President Obama did a startling thing. Calling an impromptu press conference, tieless and with his tieless nominee, he pledged to appoint Federal Reserve Chairman Ben Bernanke to serve a second term:

I’m focused on continuity with Ben
The President was under no deadline pressure. The nomination could not be formally submitted until December and Mr. Bernanke will not be reconfirmed until January.
[Snip]
Expected aftermath. Long, long ago, an investment professional in whom I’ve always had confidence told me, Adjusted for inflation, no government bond has ever yielded above par. That is, no matter what rate the government pays you on its bond, the value of those future payments is less than the cash you started with. The reason is simple – government influences the inflation rate. So while it may pay you the stated interest, it has always deflated the value of those payments faster.
Chairman Bernanke is way too smart and too well informed not to know this, and in fact to be quietly counting on it. He’s lying low now – all the descriptions are affable, mild-mannered, non-confrontational – because like his predecessor Alan Greenspan, he knows the Fed chairman’s world is divided into two periods: when one is seeking appointment, and the rest of the time. In the former, one plays nicely with the other children and does nothing to offend or call attention to oneself. In the latter – which is most of the time – one acts as one thinks best with neither warning nor justification.
Chairman Bernanke wants to preserve not just his job, but also its clout – meaning the Fed’s independence. Once he has that, I believe he will set out to raise interest rates, and inflation, as the sole means of curtailing our overextended government:

Those are CBO projections, meaning non-partisan and probably a tad optimistic
As we know, Mr. Bernanke was reconfirmed, financial reform passed, and the Fed’s independence was not curtailed.

“All is proceeding as I have foreseen.”
Now resettled in his chair, with a term longer than the President’s, Mr. Bernanke will continue to keep the US’s long-term economic health in view:
At least some more bullish analysts think he did what he should have done – cheerlead for the economy to create some confidence — rather than get caught up in the weeds of murky data and possibly unwieldy policy tools.

Paulsen argues that the recent grim housing figures were largely the result of the expiration of a federal tax credit and the high unemployment claims were due to the return of temporary Census workers to the labor force.
That’s the problem with short-term fixes – they end.
“There is nothing all that alarming about this one compared with past recoveries,” he said. ” All recoveries ebb and flow.”
So do political majorities.

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