Bernanke's (missing) exit strategy

Ben Bernanke, probably the biggest fool since John Law, has been very vocal lately trying to justify his actions and reassure people and politicians that he had a plan. So he went to congress and even wrote a long opinion in the Wall Street Journal (has the WSJ become a propaganda machine?) to explain his exit strategy. But yet, after reading everything he had to say, I cannot see any exit strategy. He just manages to hide the lack of any real strategy and understanding of the current crisis into long useless sentences and confidence-building market cheer leading.

Careful interpretation of his speeches reveal that that the Fed has really only two tools, selling its treasuries on the open market (the tool they have had since the beginning) and paying interest on reserves (their new tool which basically give free money to the banks).

Yet, Bernanke fails to say anything about the time frame for any action (economic conditions are not likely to warrant tighter monetary policy for an extended period) nor mentioning any actual numbers/figures in terms of tightening and targets. These show that he doesn't have any visibility nor vision about what to do next and will just keep on being reactive instead of being pro-active. Again, this is not the behavior of someone who is in control!

And, worst than anything, he fails to detail any strategy. He simply lists 5 tools (using overly complicated wording) which end up being only 2 tools when you account for double-counting. A list of tools does not constitute a strategy. The Federal Reserve's confidence in its abilities to solve problems it created in the first place is not a strategy. Confidence is a worrying and dangerous state of mind, when it's coming from these Wealth-Destroying Mad Scientists.

John Law (bap. 21 April 1671 – 21 March 1729) was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself[...]. He was responsible for the Mississippi Bubble and a chaotic economic collapse in France (Wikipedia).

Quotes from the Wall Street Journal:
The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner. [...]

To some extent, reserves held by banks at the Fed will contract automatically, as improving financial conditions lead to reduced use of our short-term lending facilities, and ultimately to their wind down. [...] However, reserves likely would remain quite high for several years unless additional policies are undertaken. [...]

Congress granted us authority last fall to pay interest on balances held by banks at the Fed. Currently, we pay banks an interest rate of 0.25%. When the time comes to tighten policy, we can raise the rate paid on reserve balances as we increase our target for the federal funds rate.

Banks generally will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve. Moreover, they should compete to borrow any funds that are offered in private markets at rates below the interest rate on reserve balances because, by so doing, they can earn a spread without risk.[...]

Raising the rate paid on reserve balances also discourages excessive growth in money or credit, because banks will not want to lend out their reserves at rates below what they can earn at the Fed. [...]

the second means of tightening monetary policy. Here are four options for doing this.

First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants [...]

Second, the Treasury could sell bills and deposit the proceeds with the Federal Reserve. When purchasers pay for the securities, the Treasury’s account at the Federal Reserve rises and reserve balances decline.[...]

Third, using the authority Congress gave us to pay interest on banks’ balances at the Fed, we can offer term deposits to banks—analogous to the certificates of deposit that banks offer their customers.[...]
Fourth, if necessary, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market. [...]

Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.


PragmaticIdealist said...

His entire strategy revolves around allowing banks to suckle from the Fed's teet.

"Inflation? Don't worry about that, silly! We will just pay the banks money not to lend to you fools!"

pej said...

He doesn't have a strategy but yes, he's doing everything he can to save the banks which owns the Fed (literally own, as shareholders).