Wednesday, March 28, 2012

Ben Bernanke: "Please Understand Me!"

“Please Understand Me,” the title to the 1984 book building on the Myers-Briggs personality-type tests, constantly comes to mind each time I hear a new effort by Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System, to “communicate” with the public.

Tuesday, Mr. Bernanke gave the third of his scheduled four lectures at George Washington University about Federal Reserve monetary policy.  This has followed efforts to get the minutes of the meetings of the Open Market Committee out to the public in a more timely fashion; efforts to have periodic meetings with the press to discuss the policies of the central bank; and the recent efforts to make the economic and interest rate forecasts of the members of the Open Market Committee available to the public. 

Now, Mr. Bernanke has felt the need to get out among “the people” and discuss the conduct of monetary in a series of four lectures aimed at expanding, within an academic environment, his rationale and analysis of what the Federal Reserve did and what the Federal Reserve has achieved. 

The continuously expanding efforts of Mr. Bernanke to get his personal viewpoint across only lends credence to the feeling that “the world”, especially the financial community, doesn’t understand what Ben is trying to do and how his efforts are succeeding. 

No one in such a leadership role that I can think of has felt the need to plead, within the community that he operates, to justify his actions, as Mr. Bernanke has.

Can you imagine Paul Volcker or William McChesney Martin (Fed Chairman from April 1951 to February 1970) publically defending their actions while they were still in office?

“The Fed’s efforts prevented a ‘total meltdown’ of the financial system at a time when fears of a second Great Depression were ‘very real,’ Mr. Bernanke said Tuesday…” (

It was not pretty…what the Federal Reserve did…but it achieved its end.  A second “Great Depression” did not take place. 

Mr. Bernanke, a student of the Great Depression who learned a great deal from Milton Friedman, pursued a policy that was consistent with Friedman’s analysis of the events of the 1930s.  In the period 1929 to 1933, Mr. Friedman estimated that the Federal Reserve allowed the M2 money stock in the United States to decline by one-third!  The conclusion that Mr. Friedman drew from this is that the Federal Reserve should have done whatever was possible to have kept the M2 money stock from declining!  

This lesson did not escape Mr. Bernanke under the circumstances. The Fed’s policy during this period of financial crisis was to throw as much “stuff” against the against the wall as possible to make sure that enough of the “stuff” stuck on the wall that another Great Depression would be avoided.

What is there not to understand with this policy?

Sell Bear Stearns, rescue AIG, bailout the banking system, by mortgage-backed securities and so forth…. 

And, in a time of panic, when uncertainty reigned, anything was acceptable. (

This was all “stuff” that was thrown against the wall. 

Mr. Bernanke has followed the game plan.  The money stock did not decline in this instance.  However, the Fed does not control the money stock directly.  In terms of things it can control, like the monetary base, the Fed expanded the monetary base from about $850 billion in August 2008 to $1.7 trillion in January 2009.  In February 2012 the monetary base averaged about $2.7 trillion.  Excess reserves at commercial banks rose from about $2.0 billion in August 2008 a current level of around $1.6 trillion.

This expansion of monetary assets is historically unique!  The “stuff” got put out there!

And, the “stuff” will stay out there as long as there are weak spots in the economy and the financial system.  For example, the banking system is still extremely weak with more than 800 banks on the FDIC’s list of problem banks and more than that are on the edge of being problem banks.  And, this is with large numbers of home foreclosures in the future along with a continued weakness in the commercial real estate area.  Bank failures along with bank consolidations still proceed at a relatively rapid pace.   

Whether we get another round of quantitative easing or not, we will see the “stuff” around for some time yet.  Excess reserves in the banking system of around $1.6 trillion!  My guess is that we won’t see this declining by much until the banking system gets a lot healthier.

What is there not to understand about what the Fed has done and is doing?

Mr. Bernanke seems to feel that it continually needs explanation and justification.  I believe that this feeling is just Mr. Bernanke’s problem.   

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