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In a fascinating exchange between Federal Reserve Chairman Ben Bernankeand Congressman Paul Ryan, the Republican from Wisconsin accused the Fed of eroding peoples’ savings, creating a false sense of security by manipulating the yield curve, and bailing people out by indirectly engaging in fiscal policy.
Bernanke hasn’t been comfortable the last couple of times he was forced to testify in Congress. On Thursday, the Fed Chairman was questioned by the House Budget Committee on the state of the economy.
After giving his usual description of the economic outlook (inflation has remained moderate, unemployment is high, Fed will do whatever it can to keep the modest recovery on track), Bernanke faced the sharp tongue of Paul Ryan, Chairman of the House Budget Committee.
More than questioning him, Ryan expressed his concern that Fed policy would cause more harm than good. Ryan told Bernanke the Fed was “too loose for too long,” effectively causing a dislocation of capital that led to the real estate bubble and subsequent financial crisis.
Ryan said he felt fear that because Bernanke denied the Fed was responsible for the crisis, via ultra low interest rates for too long, his current policy mix could cause economic disruptions to a possibly catastrophic magnitude.
The exchange was essentially a Paul Ryan monologue, Bernanke answered most questions as he did reporters’ questions in last week’s post-FOMC press conference. Regarding the effects of quantitative easing on savers, Bernanke acknowledged that flattening the yield curve eroded savings and caused hardship on some, but noted a weak economy was even more dangerous.
Ryan also accused Bernanke of “putting a cap on price discovery” and creating a false sense of security by keeping rates low. While a reasonable argument, Bernanke debunked it by citing the case of European PIIGS, where a loss of confidence led to spiking yields. “If [Treasury] investors lose confidence, rates will go up and there is nothing [the Fed can do about it],” said Bernanke.
Others have said Bernanke’s curve flattening is the natural precursor to a recession. For major banks like JPMorgan Chase, Citi, and Wells Fargo lending is less lucrative in an environment of flat yield curves.
Fed Chairman Bernanke also warned House members to focus on a rising structural deficit and its possibly harmful effects on the economy. Calling it unsustainable, Bernanke noted the “structural balance didn’t come about overnight,” rather it’s a consequence of bad policy and a demographic problem: aging population and rising healthcare costs. Failing to fix the problem would lower the government’s capacity to respond to a crisis, crowd out productive capital, and force the U.S. to dedicate a greater percentage of its funds to debt financing and away from more productive endeavors.
Congressman Ryan was constantly on the offensive. The Republican from Wisconsin told Bernanke the Fed was “bailing out” debtors by “jumping into fiscal policy.” Ryan’s “fear” is that while the Fed is “supposed to keep our currency as a credible store of value,” Bernanke’s incursions into fiscal policy were inhibiting this goal.
As has been the case lately, the Fed has been in the spotlight, in a more negative than positive way. Economic upheaval, global volatility, and a weak recovery have helped Fed bashers feel emboldened. Forced to develop thick skin, Bernanke carries on with his plan to use monetary policy to get the economy back on track.
source: forbes.com
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