Opinion Forum

The Fed, the QE, and the Ben Bernank

November 23rd, 2010

Thanks to Rob at Wind Rose Hotel for finding a great explanation of how the Federal Reserve works, what the Quantitative Easing is, and how the Ben Bernank fits into everything.

After watching the video everyone will finally understand what’s going on. Well, maybe everyone except economists — they’re still trying to figure out how the Humpty Dumpty can be put back together with a huge infusion of tax dollars.

Articles written by Tom Carter
Tags: Ben Bernanke, deflation, Federal Reserve, inflation, QE, Quantitative Easing
Categories: Economics, Humor, Politics | Comments (9) | Home

9 Responses to “The Fed, the QE, and the Ben Bernank”

Rob | November 23rd, 2010 at 7:46 am

And to think that the primary motivations for creating the Federal Reserve System, back in 1913, were to supervise and regulate banking institutions, to maintain the stability of the financial system, and to address banking panics… 😉

Thanks for linking to WRH!

Brian | November 23rd, 2010 at 10:20 am

Rob, the worst economic crisis in our country’s history was precipitated by the Federal Reserve. It started in 1929. We know it today as “The Great Depression.”

The only thing centralized banks are ever good at is enriching themselves and their cronies.

Tom Carter | November 24th, 2010 at 4:34 am

I thought the cartoon video was hilarious, but let’s be serious for a moment. Almost everyone, including me, loves throwing stones at economists. After all, they’re pretty easy targets, right up there with weathermen because of the risky business of predicting the future in chaotic environments. However, almost everyone throwing rocks at economists, including me, is not overburdened with an excess of expert knowledge.

Ben Bernanke is a brilliant and highly respected academic economist. What’s more, he’s recognized as a foremost expert on the Great Depression, which by every measure was far more severe than the recession we’ve recently gone through. Anyone who wants to spend a little time reading what Bernanke actually thinks about the causes of the Great Depression and the impact of the gold standard on economies worldwide would benefit from reading Money, Gold, and the Great Depression, a speech he made in 2004, when he was a Fed governor and before he was appointed Chairman (2006). Here’s an excerpt from the conclusion:

The finding that leaving the gold standard was the key to recovery from the Great Depression was certainly confirmed by the U.S. experience. …

Some important lessons emerge from the story. One lesson is that ideas are critical. The gold standard orthodoxy, the adherence of some Federal Reserve policymakers to the liquidationist thesis, and the incorrect view that low nominal interest rates necessarily signaled monetary ease, all led policymakers astray, with disastrous consequences. We should not underestimate the need for careful research and analysis in guiding policy. Another lesson is that central banks and other governmental agencies have an important responsibility to maintain financial stability. The banking crises of the 1930s, both in the United States and abroad, were a significant source of output declines, both through their effects on money supplies and on credit supplies. Finally, perhaps the most important lesson of all is that price stability should be a key objective of monetary policy. By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy and, through the workings of the gold standard, the economies of many other nations as well.

I realize that nothing Bernanke or any other highly qualified economist might say will influence the views of some non-economists who have fixed views on the subject. Bernanke isn’t a politician, and he may make what are essentially political mistakes along the way. But after reading quite a bit about him and collecting a few actual facts along the way, it seems he may be the right man to run the Federal Reserve right now.

Brianna | November 26th, 2010 at 1:37 am

Tom, if I were you, I’d wait before I judged Bernanke or any other individual or policy the Fed is handing down right now. After all, in 2006 Alan Greenspan was an economic hero. Anyone think he’s a hero now? Anyone?

The simple fact of the matter is, there’s no such thing as the right person for the Fed, because there’s no such thing as a correct policy for the Fed. The Fed’s job is basically price-fixing; they fix the price of money by setting interest rates. And as we all know from Econ 101, there’s no such thing as a correct price when it comes to government price fixing. If the price is set too high, nobody borrows money and investment slacks off. If the price is set too low (a far more common problem with government price fixing) then there is too much demand, not enough supply, and shortages. It never fails. People complain now that Greenspan’s failures while running the Fed are proof that free-market ideas failed or are flawed, but most actual free-marketers spent 18 years wondering how anyone smart enough to write “Gold and Economic Freedom” was also dumb enough to think that the only problem with the Fed was that nobody had ever run it right!

As for your assertions that Bernanke is a highly respected academic economist, well Paul Krugman is a highly respected academic economist and I wouldn’t use his column to line my birdcage. If there’s one thing everyone in America knows these days, it’s that a degree in economics from a respected economics program doesn’t mean diddly when it comes to actually knowing something about economics.

The reason I listen to Austrian economists (a set of economics ideas which are absolutely scoffed at by the “highly respected academic economists”) is because they work. The Austrians successfully predicted the housing bubble crash and the fiscal crisis, as anyone who has watched a “Peter Schiff was right” video can tell you. Schiff was warning of impending doom back in 2005 and 2006, even as most of the “highly respected academic economists” were literally laughing their heads off at his supposed foolishness. Call me crazy, but when a guy gets it right, I listen to him. Then again, I’m not a “highly respected academic ecnomist” either. Maybe if I were, I’d be blathering on about the benefits of “boosting consumer spending” and “increasing aggregate demand” with the rest of the Keynesians.

Tom Carter | November 26th, 2010 at 3:54 am

The debate over the wisdom of having a central bank largely independent of political influence was settled long ago. It isn’t going away. I assume your preference would be to have no authority with power to deal with national monetary policy, supervise and regulate banks, influence interest rates, etc. This isn’t the 1830s, and I doubt that many people would prefer to descend into a state of nature in economic policy.

Some of what Greenspan did may have been wrong, and some of what Bernanke is doing may turn out to be wrong. But they’re doing a job that someone has to do, and it appears to me that Bernanke is well-qualified. The fact that some economists of the neoclassical, libertarian Austrian school may disagree isn’t the last word on the subject.

I don’t think it’s fair to compare Bernanke to Krugman. Krugman’s Nobel for earlier work on international trade, consumer preferences, etc may have been well-deserved for all I know. However, the problem with Krugman is that his extreme liberal views dominate and twist his thinking in a broad sense. That’s inevitably true of anyone who espouses extreme political views, regardless of their intelligence or qualifications in other fields.

Brian | November 26th, 2010 at 6:29 am

Yes, I can see where you might be enamored of an authority which funds the out of control spending of the federal government, that has helped us achieve a $14T debt. Its primary mission is economic stability. Yet, we’ve had much wilder swings since its inception than we ever had prior to its inception.

Top-down government and top-down economic planning do not work, they never have, and generally only succeed in imposing more and more tyranny.

If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered. — Thomas Jefferson

No, it isn’t 1800 anymore, but wow, that “homeless” part sure seems to ring true, even 210 years later.

The debate is settled? I quite agree – fiat currencies are ruinous and are the province of despots throughout all times and in all places.

The greatest failing of the philosophy behind central banking (and I’m being generous here – they’re run by thieves) is the patently silly idea that economies can be “controlled.”

Tom Carter | November 26th, 2010 at 9:17 am

Brian, you can see I might “be enamored of an authority which funds the out of control spending of the federal government, that has helped us achieve a $14T debt.”? That’s reductio ad absurdum. The absurdity is that I or anyone else would think that way. I won’t go much further with this, except to note that the Fed doesn’t “fund out of control spending.” If you think deficits and debt are out of control, then write to your members of Congress and tell them to raise taxes and reduce spending.

That quote, or variations of it, has been around for a while, and it’s true that it has been attributed to Jefferson. However, there’s no known primary source to substantiate it. The first clues are the words “deflation” and “inflation.” “Deflation,” as used in the quote, dates from early in the 20th Century. “Inflation,” in that usage, has been around longer but wasn’t there during Jefferson’s lifetime. Brilliant as Jefferson may have been, I doubt that he was prescient enough to use words whose meanings didn’t exist during his lifetime.

Here’s something Jefferson actually did say:

The States should be applied to, to transfer the right of issuing circulating paper to Congress exclusively, in perpetuum, if possible, but during the war at least, with a saving of charter rights. I believe that every State west and South of Connecticut river, except Delaware, would immediately do it; and the others would follow in time. Congress would, of course, begin by obliging unchartered banks to wind up their affairs within a short time, and the others as their charters expired, forbidding the subsequent circulation of their paper.

That’s from a letter to John Wayles Eppes written on June 24, 1813. It would seem to contradict what you think Jefferson thought, but I have to tell you, reading the whole letter makes it clear that his thoughts on banking and currency don’t make a lot of sense in today’s world — we’re no longer a little agrarian country with limited communications operating in a financial world that had few connections outside our own borders.

You can selectively quote Founders all day long, and some of them can be taken to support libertarianism and even anarchy. After all, they were thinking and writing within a frame of reference that’s two centuries old, and taken out of that context their words can be selectively quoted and taken to mean whatever you want. The fact is, however, that the Founders were divided on the wisdom of having a central bank. Beyond that, they (or some of them) participated in founding the First Bank of the United States in 1791.

Brianna | November 26th, 2010 at 11:22 am

That’s funny Tom; I found a good deal of the letter worth looking at, and quite relevant in light of what is going on today. The part about how the future generations have no obligation to pay off the present generation’s debts, for example, and how it is immoral for the present generation to take on public debt that would have to be paid off by future generations. How to do so inevitably leads to war and revolution. And how the unlimited emission of a paper currency can banish specie and send a country into bankruptcy. Granted, Jefferson thought the problem was that private bankers were issuing too many banknotes, and that the solution was to put the currency under public control. But I think the modern experience with fiat currencies and central banks (not to mention the old experience with the worthless Continental) show that it’s better to have an individual bank issue notes against its reserves, with competition to ensure that they do not go too far and other banks around to pick up the pieces if they fail, than to put it all in the hands of a central government who has no limits to its power and whose pieces cannot be picked up by anyone if it fails.

Tom Carter | November 26th, 2010 at 11:48 am

I agree with Jefferson’s observations on the problem of passing public debt on to future generations. How could anyone disagree? As to the rest….

Do you actually think there should be no central bank, no federal management of the economy, and individual banks issuing their own currency based on their reserves? The glaringly obvious problems with all that were what motivated Jefferson to want monetary policy under under centralized federal control.

Solutions of the 18th and 19th Centuries that didn’t even work then are hardly workable today. More to the point, they’re useless in advocating public policy positions that have to actually work in the real world today.