Tough Guy Bernanke Blows Smoke
Fed Chairman Ben Bernanke appeared before Congress this week wearing
his “bad guy” face. I did not watch his testimony either day.
Apparently, based on news reports and blogs, nothing of significance
happened on the second day.
The Washington Times reported on Bernanke’s Wednesday testimony:
With uncharacteristic bluntness, Federal Reserve
Chairman Ben S. Bernanke warned Congress on Wednesday that the United
States could soon face a debt crisis like the one in Greece, and
declared that the central bank will not help legislators by printing
money to pay for the ballooning federal debt.
“We’re not going to monetize the debt,” Mr. Bernanke declared flatly …
These
statements are unequivocal. It will be interesting to see how Bernanke
rationalizes his way out of this testimony. I don’t believe he can stop
and pointed the reasons out in an AT post, Obama’s Ides-of-March Moment is Near on 2/24.
My guess is that Bernanke’s wiggle room will turn on something akin
to what the definition of “is” is. It is likely to turn on a narrow
definition of Quantitative Easing (QE) or “monetizing the debt.” The
Fed considers monetizing the debt a direct purchase of newly-issued
Treasuries. But QE, as monetizing the debt is known, can be performed
indirectly and, I suppose, claimed to be not QE
Here is a simple example illustrating both direct and indirect
methods that show their equivalence. First the direct example: Suppose
the Treasury was to issue another $50 billion of debt and the Fed
bought it directly. That would clearly be considered QE. The nation’s
money supply would increase by $50 billion. The Fed’s balance sheet
would increase by $50 billion of new Treasuries.
Here is one way that indirect QE occurs and has occurred. A bank has
toxic assets of $50 billion that it wants to get rid of. The Fed agrees
to buy them at face value so long as the bank to uses the proceeds to
buy Treasuries from a primary dealer. The Fed’s balance sheet has
increased by $50 billion of toxic assets (presumably worth less) while
$50 billion of new money has been created to buy them. The $50 billion
goes into new Treasuries, recently bought by the primary dealer.
Economically there is absolutely no difference between the first and
second example. They are both QE, regardless of whether the Fed says
they are or not. To understand whether QE is taking place, all one has
to do is look at the total assets of the Federal Reserve Balance Sheet.
If they are increasing, QE is occurring.
You will know when QE stops one other way. Social Security or Medicare payments will stop.
Monty originally posted this on American Thinker.