With the Federal Reserve System’s announcement that it would purchase long-term government bonds, as well as the now-worthless mortgage securities from the “nationalized” Fannie Mae and Freddie Mac, Fed Chairman Ben Bernanke supposedly is making a move that the New York Times calls “bold but risky.” I have another term for it: reckless.
There can be no doubt anymore as to what the government is doing as the economy implodes; it is printing money as fast as it can in hopes that people will grab the cash and start spending. Furthermore, the Fed’s actions bring together the twin frauds of monetary and fiscal policy in a double-whammy on what is left of the economy. It is true that the markets jumped when the news of Bernanke’s move hit the streets, but within a day, buyers’ remorse had set in along with the very things that one might expect to see when inflation has become the economic watchword.
According to Keynesian macroeconomists, governments can follow two sets of policies when attempting to “fine tune” the economy. The first is monetary policy, in which the central bank manipulates bank reserves to expand or contract the amount of money in the system. The second is fiscal policy, in which the government attempts to drive and guide the economy through taxation, spending, and borrowing.
Keynesians admit, unfortunately, that there are limits to both actions. On the monetary side, the Fed can fill up bank reserves (as it has done recently through both its bailouts and purchases of government bonds), but if banks do not see good lending opportunities, the new money does not circulate, a situation Keynesians call a “liquidity trap,” while others refer to it as the Fed “pushing on a string.”
Thus the Keynesians (including Paul Krugman) believe that active fiscal policy is needed to stimulate an economy in the doldrums. Government borrows from the credit markets or takes in taxes and then spends the money on various “stimulus” activities such as public works or anything else politicians want. (Tax cuts also are part of “fiscal policy,” although it is clear that the current administration does not want any part of reducing taxes.)
However, there also are limits to what fiscal policy can do, given the limitations of taxation and borrowing. There is only so much a government can take in taxes, and not everyone is jumping to purchase the Treasury’s latest round of debt. Therefore, what is a government to do?
Bernanke has provided the “solution,” if one can call it that. The Fed is going to become a buyer of “first resort” for a lot of government paper, which means that Bernanke is not going to make the government go through the possibly-humiliating experience of putting bonds out for sale with no takers.
(Secretary of State Hillary Clinton recently told Chinese monetary authorities they had better continue to purchase U.S. Treasuries, since, in her words, “We are all in this together.” Because the U.S. government is steering the economy over the cliff, everyone supposedly will be much happier if the Chinese and Japanese also point their economies in the same direction. Call it the March of the Lemmings.)
For all of the talk of boldness, however, there is nothing courageous about government authorities printing wads of money. The government in Zimbabwe has been doing it for some time, and the results have followed the proud tradition of Germany in 1923, Argentina, and Bolivia. Unfortunately, Bernanke and his Ivy League-educated friends seem to believe that their “vast intelligence” and knowledge of monetary issues will keep them from steering the country in the same disastrous direction that other inflation-minded cranks of the past have gone.
Inflation and the disaster it brings are no mystery. Instead of putting the economy back on the right road, Bernanke, Congress, and the Obama administration are shunting the economy down the wrong track and tying down the throttle. The markets soon enough will let everyone know what is happening – even if the voters and the state-worshiping media never catch onto the government’s latest inflationary caper.
