Bernanke And The Lender-Of-Last-Resort At 100?

MAKE MONEY BLOG~In case you didn’t realize it, we are bearing down on  2013– the 100th anniversary of the Federal Reserve Bank. Whether Bernanke will continue to be at the Fed’s helm– a matter subject to the winner of the White House sweepstakes, as well as his own designs– will impact financial markets.

I, for one, hope that he is still in place, as he has served well to bring us through the near collapse of finance in September, 2008– and with his easy money policy and zero interest rates, helped to nudge asset prices, stocks, bonds, some commodities– though not housing– ahead in order to help household wealth rebound enough for a very modest recovery.

The price we paid was tough on savers and retirees  dependent on the  interest paid  from the fixed income investments they owned. It also helped raise the nation’s debt level to over $15 trillion– and added an uncomfortable $2 trillion to the Fed’s own balance sheet.

Some harsh critics believe we will never get off the narcotic fix of quantitative easing– the purchase of long term Treasury securities as well as the selling of vast amounts of short term Treasury bills to finance the government. We are risking  a sudden spike in interest rates– which will hike the government’s cost of servicing the debt top unimaginable heights. Pray it doesn’t happen.

And thank Bernanke for not repeating the mistakes of  the Great Depression when policy errors  such as tightening monetary policy in 1928 and 1929 to stem stock market speculation, caused a panic of margin selling. This was compounded by another tightening in 1931 to  stabilize the price of the dollar. In 1932 at the depth of the Depression, there was policy inaction, according to Bernanke’s version of the period, delivered in  a talk on Monetary Policy in the Great Depression– which is must reading.

Bernanke took up the mandatory role as lender-of-last resort in 2008 and 2009 because he understood only too well that in the early 1930s,  “The Fed responded inadequately to bank runs and the contraction of bank lending, providing only minimal credit to banks,” as he put it in  his power-point presentation.

As the recovery is still too slow for many critics and Bernanke naturally is a symbol of the inadequacies of policy-making, we will hear more sharp outcrys against him as  we approach the Fed’s Centennial. As with all policy-making institutions it has made serious blunders, yet the existence of a central bank cooperating with central banks in the UK, Europe and elsewhere is a crucial safty valve in the increasingly global economy.

Here’s how Bernanke defends the trillions of large-scale asset purchases by the central bank; Quantitative easing “lowered longer-term interest rates; 30 year mortgage rates fell below 4 percent. Corporate credit became more available, and stock prices rose. Lower longer-term interest rates helped promote recovery, though the effect on housing was weaker than hoped.”

I could not blame Bernanke for wanting to return to the quieter groves of academia, or to  go on the well-compensated speaking route, and to defend his position in economic history by writing his memoirs. I’ll bet he would be a great deal more gritty and honest about his shortcomings than his predecessor, Alan Greenspan.

source: forbes.com

please give me comments thanks

Posted in: Ben Bernanke