Fed Chairman Bernanke needs to send a stimulating message
By Ezra Klein
Washington Post Staff Writer
Friday, October 22, 2010
The worst word in Washington is "message." Whenever anything goes wrong, politicians begin blaming their messaging operations, as if a better-chosen sound bite by a more-silver-tongued aide would have spared them the consequences of their actions. It's almost never true. Almost. But for Federal Reserve Chairman Ben S. Bernanke, the economy - not to mention the Fed's credibility - might be riding on whether he's willing and able to talk to Congress.
In a recent speech at the Federal Reserve Bank of Boston, Bernanke made perfectly clear that the central bank is tired of watching the economy stagnate. "With an actual unemployment rate of nearly 10 percent," he said, "unemployment is clearly too high" - and, yes, the italics are in his prepared text. So the Federal Reserve is likely to begin purchasing Treasury bonds - "quantitative easing," it's called - in an effort to lower interest rates and spur the economy. They did this in 2009, and to great effect.
But the Federal Reserve can't go it alone. No one gets a job when the central bank buys a bond. It's only when the Fed's decision to buy a bond persuades some other economic actor to spend money that hiring ticks up. And thus far, that's not been happening. Banks and corporations have simply been stockpiling their cash, waiting for a recovery that, paradoxically, won't take hold until they start lending and spending again.
"I'm worried," says Alan Blinder, a former vice chairman of the Federal Reserve's Board of Governors. "I'm quite convinced that it'll be a lot less effective than the first time we did this, and that makes me worried that it won't be very effective." That's because the last round of QE worked very differently: The Federal Reserve bought mortgage-backed securities at a time when the market for them was frozen. That created liquidity where there wasn't any. Now they're planning to buy long-term Treasury bonds that are already in high demand. They're creating liquidity, in other words, where it already exists.
(More here.)
Washington Post Staff Writer
Friday, October 22, 2010
The worst word in Washington is "message." Whenever anything goes wrong, politicians begin blaming their messaging operations, as if a better-chosen sound bite by a more-silver-tongued aide would have spared them the consequences of their actions. It's almost never true. Almost. But for Federal Reserve Chairman Ben S. Bernanke, the economy - not to mention the Fed's credibility - might be riding on whether he's willing and able to talk to Congress.
In a recent speech at the Federal Reserve Bank of Boston, Bernanke made perfectly clear that the central bank is tired of watching the economy stagnate. "With an actual unemployment rate of nearly 10 percent," he said, "unemployment is clearly too high" - and, yes, the italics are in his prepared text. So the Federal Reserve is likely to begin purchasing Treasury bonds - "quantitative easing," it's called - in an effort to lower interest rates and spur the economy. They did this in 2009, and to great effect.
But the Federal Reserve can't go it alone. No one gets a job when the central bank buys a bond. It's only when the Fed's decision to buy a bond persuades some other economic actor to spend money that hiring ticks up. And thus far, that's not been happening. Banks and corporations have simply been stockpiling their cash, waiting for a recovery that, paradoxically, won't take hold until they start lending and spending again.
"I'm worried," says Alan Blinder, a former vice chairman of the Federal Reserve's Board of Governors. "I'm quite convinced that it'll be a lot less effective than the first time we did this, and that makes me worried that it won't be very effective." That's because the last round of QE worked very differently: The Federal Reserve bought mortgage-backed securities at a time when the market for them was frozen. That created liquidity where there wasn't any. Now they're planning to buy long-term Treasury bonds that are already in high demand. They're creating liquidity, in other words, where it already exists.
(More here.)
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