I’ve done my share of criticizing the Federal Reserve under Ben Bernanke. It didn’t apply proper oversight to the casino of swindles and fast money called the “financial services sector.” It failed to provide transparency as it took perhaps trillions in toxic “assets” off the books of the biggest banks. It has been a foot-dragger on real reform. Bernanke’s Fed has done too much to help those who caused the collapse instead of the other way around, as Nassim Taleb (he of The Black Swan) and others have observed.
On the other hand, if it hadn’t acted with dispatch to provide liquidity during the great panic of October 2008 and fight deflation since, the Great Recession would look like the roaring ’90s. The latest round of Fed action, so-called QE2, is aimed at pumping more money into an American financial system that remains weak. This has brought out new platoons of Fed bashers.
In his usual flashy style, former Fed Chairman Alan Greenspan implicitly criticized Bernanke and QE2 in a Financial Times op-ed, writing that Washington was deliberately weakening the dollar. He could be writing the briefing papers for our trade partners, who are also steamed (including serial currency manipulator China)
Investor Jim Rogers has been on a long rant against the Fed’s latest moves, calling Bernanke “a disaster,” and going so far as to say the Fed would go the way of the Second Bank of the United States. In today’s Wall Street Journal, meanwhile, we get a preview of the opposition the central bank is facing from Republican politicians and right-leaning economists.
Set aside the question as to why Greenspan has any credibility at all, except for being a middling former jazzman. Almost all these critics are coming from the bubble/deregulation philosophy that caused the Great Recession in the first place. Now they are of the Pain School, a la Hoover Treasury Secretary Andrew Mellon. His prescription for the Great Depression: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” Only this time, they would not liquidate the oligarchs. They refuse to invest in infrastructure or pursue other policies that would help expansion and create jobs (tax cuts haven’t worked). So what is the Fed to do?
I’ll end with Paul McCulley from PIMCO, who gives a more charitable assessment of the latest Fed move:
…unconventional has now become conventional. Nattering nabobs of negativism should accept that. To be sure, current monetary ease is likely to be much less effective in bolstering aggregate demand growth than historically, given liquidity trap conditions. But the transmission mechanism is the same, including a lower level for the foreign exchange value of the dollar. The Fed makes policy consistent with its legislative mandate handed down by the democratically-elected government of the United States. And that’s what the Fed is pursuing: mandate-consistent levels for inflation and the unemployment rate. This is as it should be.
Today’s Econ Haiku:
So who’s behind the curtain