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Bernanke May Not Remember That the Fed Brought the Economy to the Brink of Collapse, but Reporters Should
Yes, it was way back in the fall of 2008, but we do know that the economy was on the brink of economic collapse. We know that the Fed brought the economy to the brink of collapse because that it is what Federal Reserve Board Chairman Ben Bernanke told Congress when he was trying to get to approve the $700 billion TARP program.
Mr. Bernanke's memory may not extend back to last year, but the memory of the reporters who cover the Fed should. This means that when Bernanke warns that taking away regulatory powers from the Fed could lead to stability, reporters should provide this crucial piece of background as ridicule. Mr. Bernanke's concern over the Fed's role in maintaining financial stability is a bit like Hormel expressing concern over the treatment of cattle.
--Dean Baker
COMMENTS (10)
This means that when Bernanke warns that taking away regulatory powers from the Fed could lead to instability.
Right?
Posted by: peterb | November 28, 2009 8:11 PM
Mr. Baker:
Some related questions perhaps you can answer:
Regarding the TARP and the stimulus package, each in excess of $700 billion, was this money borrowed, or, did the government simply print the money, thereby expanding the money supply. Was it a combination?
If the money supply was intentionally expanded, why are we not seeing more inflation?
Thanks.
Posted by: Serious Implications | November 28, 2009 11:40 PM
Banks literally create money out of thin air. They take your deposit and lend it out multiple times. In some cases in recent years, one dollar of deposits could result in fifty dollars of loans.
In the recent financial meltdown, banks reduced that ratio. In essence, they destroyed money. That is why we're in a liquidity crisis today. And that is why government actions to increase the money supply are not resulting in inflation.
Posted by: Chris V | November 29, 2009 12:37 PM
Exactly. What is wrong with Americans' memories? Dana Perrino said there were no terrorist attacks during Bush's administration, ignoring 9/11/01! Now Bernacke is trying to ignore the Fed's colossal failure to use its regulatory powers in the 2001-08 housing bubble, & reporters blithely report his statements without providing a bit of context!
Journalism is not stenography. "He said, she said" is not journalism. Journalism provides context to a person's words. Here that would include mentioning that the Fed did not use its regulatory powers to prevent the housing bubble, & that its monetary policy was a prime cause of the bubble.
Posted by: Michael "mickeyrad" Radosevich | November 29, 2009 2:31 PM
The Federal Reserve works for its member banks. It is understandable that it beats its chest and proclaims that it saved the universe - this helps it to perpetuate its brand.
Allowing Bernanke so much prominent and easy access to state the Fed's case amounts to nothing more than free advertising.
Posted by: some guy in a cube | November 29, 2009 5:28 PM
Chris V:
Thanks. That helps, but the part about creating money out of thin air still fascinates and puzzles me.
I get that they loan money they don't really have and sell the debt. Hell of a business. What a f****** joke!
Posted by: Serious Implications | November 29, 2009 8:28 PM
We haven't seen mega-inflation because the banks aren't lending, thereby multiplying reserves by 10.
So when things get better, they start lending and BAM!
eh?
Posted by: anondude | November 30, 2009 3:33 PM
The banks aren't lending, but the stimulus money is pouring in. Is the stimulus "small potatoes" compared to the way the banks used to lend?
Were the loose-money policies of Greenspan's Fed, just another kind of stimulus package, only a lot bigger?
Posted by: Serious Implications | November 30, 2009 9:54 PM
"If the money supply was intentionally expanded, why are we not seeing more inflation ?"
Good question. IMO, we had horendous inflation in housing prices, all commoditees, and all asset classes. The problem is that "officialdom" doesn't count asset price inflation as inflation. Inflation is measured against wage increases. By allowing manipulation of the currency market to keep the dollar too high and opening the flood gates to foreign goods, the official inflation rate was manipulated to appear benign. The resulting loss of sustainable jobs in the real economy was masked by the unsustainable jobs associated with the housing bubble.
By manipulation of the interest rates lower and promoting insane lending practices, the Fed lent political support to the corrupt economic policies of the Bush years, just as they did during Reagan/Bush years.
The bubble fooled Americans into thinking that their wages would eventually catch up to the rising prices, inducing them to maintain spending by borrowing. We now realize that the Fed allowed and promoted the debt bubble, essentially creating a significant marginal demand by funneling money, and purchasing power, to people and companies who never could have afforded the houses and CRE construction they purchased. The massive rate of foreclosure is indesputable evidence.
A particulary egregious Fed activity, was allowing and promoting the deployment of the various fraudulently rated bond issues, off balance sheet vehicles, and derivative schemes that targeted and divereted the national savings into the pockets of wall street.
Posted by: zinc | November 30, 2009 11:32 PM
One of the best parts of Obama's speeches is that they seem to implicitly acknowledge his limitations. In this speech, Obama said "Even those of us with the best intentions will at times fail to right the wrongs before us." For liberals, that may be the lesson of the first year of Obama's presidency.
Posted by: rolex replica | December 10, 2009 11:55 AM