JIM LEHRER: And still to come on the NewsHour tonight: fighting for fighter jets; learning about feelings; and making a deal in California. That all follows the economic outlook, and to Gwen Ifill.
GWEN IFILL: Federal Reserve Chairman Ben Bernanke returned to Capitol Hill today for his semi-annual report on the state of the economy and just in time to deal with congressional anxiety about the cost and the reach of the Fed’s intervention into the nation’s financial systems. Bernanke insisted he has an exit strategy.
Greg Ip, U.S. economics editor for the Economist, joins us to explain exactly what that is. He sounded like he was trying to be optimistic today, Greg.
GREG IP: I think he was. He talked about, for example, how the markets have basically come back to normal in many areas from a situation where they were practically dysfunctional last fall.
The stock market is doing well. Investors don’t seem to be as fearful. They’re buying stocks and bonds. Banks had a very good quarter, and they’ve raised a ton of capital.
And the signs in the economy are also getting better. Consumer spending seems to be stabilizing, and our trading partners overseas are also seeing turnarounds in their economies.
GWEN IFILL: And yet, in spite of all that, some of the lawmakers today seemed to express concern about what they felt was an unprecedented infusion of Fed money, basically printing money into the private economy, because it might spur inflation.
Chairman Bernanke was questioned here by Republican Bill Posey of Florida.
BEN BERNANKE, Federal Reserve chairman: Well, let’s be clear what’s going on. The Federal Reserve is not putting money out into the economy. What we’re doing is we’re creating bank reserves. That’s money that the banks hold with the Fed, so it’s just sitting there idly. It’s not chasing any goods, OK?
So as long as those bank reserves are sitting idly, broader measures of money that measure the circulation of money…
REP. BILL POSEY, R-Fla: But it won’t sit there idly forever.
BEN BERNANKE: Right, exactly.
REP. BILL POSEY: The purpose of it is not to sit there idly forever.
BEN BERNANKE: Right.
REP. BILL POSEY: And while there may be a time lapse, certainly, unless that money gets sucked back in out of circulation, it’s going to cause inflation. There’s no denying it.
BEN BERNANKE: If it’s not sucked back in. But as I was describing, we have ways of sucking it back in.
GWEN IFILL: “We have ways of sucking it back in.” What does that mean?
Fed moved aggressively
GREG IP: Well, essentially, the Federal Reserve had to do some pretty aggressive things to counter the severity of the financial crisis. They made emergency loans to firms, like AIG and Bear Stearns. And then earlier this year, they started buying Treasury bonds in an effort to get down long-term interest rates and give an additional boost to the economy.
Now, when they make those loans or when they buy bonds, where do they get the money? Essentially, they print it. That's what Bernanke means when they say creating bank reserves, which is just a fancy way of saying printing money.
So the natural concern is, you print money, doesn't that create inflation? What he's trying to say is, well, no. If you print money to create inflation, the money has to be spent. The money is not being spent right now. It's still sitting unused on the books of the Federal Reserve.
And the reason why is that banks do not have a lot of profitable opportunities to make loans right now, so they simply don't want to lend. The money is not getting out into the economy.
The day will come when people do want to borrow and banks will be making loans. And that's the day to start worrying about inflation. And so Bernanke spent a lot of his testimony today saying that, look, we know you're concerned about this risk out there. We have lots of ways of dealing with it when that day comes.
GWEN IFILL: When that day comes, will we also begin to see the interest rates begin to go back up?
GREG IP: Oh, absolutely.
GWEN IFILL: That's usually the measure we use.
GREG IP: Absolutely, we will. We'll see the traditional measures, the Fed raising the federal funds rate, and then you and I will see that in the prime rate in our home mortgage rates and so on.
Now, at the same time, because they've printed all this money, they'll be doing a few other things in the markets which we won't really see much of in order to try and soak up some of that money. And it's a little bit new ground for them, because these policies have not been tried before, and so they haven't had to exit from them before.
But I think one point that risks getting lost is that this is almost an academic discussion. There is no risk of inflation out there right now. We have unemployment over 9 percent. People are taking wage cuts. We are not seeing wage and price inflation right now. The kinds of concerns that people are raising right now are concerns for not just another day, but another year.
Crisis in commercial real estate
GWEN IFILL: Is it worthwhile for people to be concerned about what's happening in the commercial real estate market?
GREG IP: Oh, absolutely. In fact, one of the things that Bernanke emphasized today is that, notwithstanding that there have been some encouraging signs in the residential housing market, there's a whole other crisis, if you will, in the making in the commercial real estate market.
We have projects that were funded which can no longer be refinanced. Construction is being stopped. Banks don't want to roll the loans over, and a lot of the buildings that they finance are worth less than the original mortgage. Sound familiar?
GWEN IFILL: Except it's happening now in the business level. So, OK, so here's the other question, which came up today and which, presumably, was the undercurrent in a lot of this discussion, which is, who oversees the Fed? And to what degree can Congress impose another organization, in this case, the General Accounting Office, to keep track of all this money that's now sloshing around out there?
GREG IP: Well, it's been a long view in this country that most people have shared that the power to print money and the power to spend money should really be kept separate, because if the Congress was allowed to print the money as well as spend the money, you know what we'd get: lots of spending and lots of inflation.
The problem is, is that, in the last year or two, the Fed had to do a lot more than its usual powers, in terms of not just raising and lowering interest rates, but making loans to particular companies and industries, which looks a lot like picking winners and looks a lot like putting the taxpayers' money at risk. Now, isn't that the job of the Congress and the administration?
Most reasonable people would say that these were risks worth taking, in order to counter what was the worst crisis since the Great Depression, but it makes a lot of people in the Congress and in the country uneasy that a group of unelected people with very little sort of independent oversight from the Congress can make these big decisions.
GWEN IFILL: Yet Chairman Bernanke, being a student of history, knows it's not necessarily a good thing when the Fed cedes its power to an elected body.
Balancing act for Congress and Fed
GREG IP: Well, absolutely, because you know what happens when the Congress gets their way. Usually, they want lower interest rates, which over time leads to more inflation.
There's a real balancing act here. The Fed, in taking its aggressive actions, has done things that are unprecedented and made people uneasy. And people want more political oversight over those actions.
And the trick will be to find a way to give them what they want, perhaps more transparency, perhaps asking for the permission of the Treasury before they make some of these emergency loans, without, also, giving Congress a cudgel to beat up the Fed every time it does something unpopular, like raise interest rates.
GWEN IFILL: Well, or deal out a lot of money. Now, we know that the purpose of the Fed chairman going to the Hill today was to calm people down and say, "We've got this in hand." He wrote an op-ed today in the Wall Street journal basically trying to lay that out. Did it work, after almost a full day of hearing, with all these lawmakers asking pretty tough questions?
GREG IP: Well, if you look at the barometer of investor confidence, the stock markets seemed to be pretty happy. It went up today.
There were actually not many surprises in what he said about monetary policy, for those who have been following it carefully.
His whole strategy here about explaining in such detail how they one day planned to raise interest rates is not to suggest they're about to do it now, but to give people the confidence that, when the day comes, they can do it.
And it's a bit counterintuitive, but that actually perhaps gives him more leeway to remain aggressive now, because people will say, "Well, we know you're doing some unusual things, but we're not going to worry about this leading to inflation, because we know when that day comes you'll be on the case."
GWEN IFILL: At least that's what they're hoping.
GREG IP: That's what they're hoping.
GWEN IFILL: Greg Ip of the Economist, thank you very much.
GREG IP: All right, good to be here.
JIM LEHRER: Again, on our Web site, newshour.pbs.org, you can submit questions to Chairman Bernanke. We'll post some of them later ourselves as part of our special, "Bernanke On the Record," which is coming up later this month.