TOPICS > Economy

Bernanke Looks to Turn Tables on Critics of Fed’s $600 Billion Move

November 19, 2010 at 5:55 PM EDT
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Federal Reserve Chairman Ben Bernanke spoke at the European Central Bank in Frankfurt, defending the Fed's $600 billion stimulus and calling on China and other fast-growing economies not to gain an unfair market advantage by devaluing their currencies. Jeffrey Brown talks to Greg Ip of The Economist.
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JEFFREY BROWN: And we turn to the economy. The Federal Reserve acted, and the fallout continues.

Fed Chairman Ben Bernanke confronted critics abroad and at home directly today. Speaking at a conference in Germany, he defended the Fed’s latest plan to bolster the U.S. economy.

BEN BERNANKE, chairman, Federal Reserve: The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States.

JEFFREY BROWN: Earlier this month, the Fed announced it would buy $600 billion in U.S. treasury bonds, hoping to cut interest rates and spur lending and business expansion.

Domestic critics, including some top Republicans, like Indiana Congressman Mike Pence, charged, the Fed move will bring more debt and higher inflation.

In a statement, Pence said: “The Federal Reserve hasn’t gotten the message. Printing money is no substitute for sound fiscal policy.”

Bernanke met with Banking Committee senators this week to explain the plan. In his speech today, he argued again that Fed action is critical to job growth, and called on Congress and the Obama administration to take further steps.

BEN BERNANKE: On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years. As a society, we should find that outcome unacceptable.

JEFFREY BROWN: Chairman Bernanke, likewise, rejected international criticism that the Fed is trying to weaken the dollar to make U.S. exports more attractive. Instead, he pushed back against China and other emerging countries for keeping their currencies artificially low.

And for a closer look at all this, we are joined by Greg Ip, U.S. economics editor for “The Economist” magazine and author of the new book “The Little Book of Economics: How the Economy Works in the Real World.”

Well, open to the chapter on the Fed, right?

GREG IP, U.S. Economics Editor, “The Economist”: Right.

(LAUGHTER)

JEFFREY BROWN: Now, first of all, how unusual is this, to see the Federal Reserve chairman kind of taking people on directly and this bluntly?

GREG IP: Well, it hasn’t been so unusual lately.

Now, historically, yes, the Fed chairman does try to remain apolitical and above the fray and to sort of not get into the weeds, fighting off his critics. But, in the last few years, the Fed has to do a lot of unusual things, things that have made a lot of people very upset, such as bailing out Bear Stearns, and bailing out AIG, and extending loans to banks and so forth.

And so this actually resulted in a lot of criticism and even pressure on the independence of the Fed. You will recall there was a movement in Congress about a year ago to audit the Fed. And so Bernanke and his staff basically took the view they couldn’t just sit there and take it; they had to take their message to the people, as it were.

JEFFREY BROWN: All right. Now, this was in an international forum, so start on the international side, because a lot of today’s message was aimed at who and — and saying what?

GREG IP: Sure. So, essentially, the background here is that, in the last few months, the Fed has expanded what they call their quantitative easing program. Normally, when they want to stimulate the economy, they lower short-term interest rates. But they are already at zero. So now they are trying to lower long-term interest rates by buying bonds.

One of the secondary consequences of either of those types of policies is that the dollar falls. But, when our dollar falls, somebody else’s currency has to go up. And that is putting pressure on our trading partners, countries like Brazil, countries like Korea, countries like Europe — in Europe.

And they are unhappy about that. And so they’re essentially accusing the Fed of doing this on purpose to try and essentially rescue the American economy, at their expense.

JEFFREY BROWN: And he wasn’t having any of that, right?

GREG IP: No.

JEFFREY BROWN: I mean, he is saying, look at your — look in — look in the mirror.

GREG IP: Yes. Well, Mr. Bernanke made, first of all, made it quite clear that his goal is to revive the American economy. In the long run, that is good for the whole world, and it’s good for the strength of the dollar.

And then, yes, he sort of like turned the table on his critics. And he said, if there is a problem here, it’s countries — he didn’t really name them, but it’s countries like China, who won’t allow their currencies to go up, so that they can do some of the job of absorbing some of the growth, and, instead of running such large trade surpluses, how about you buying some of the rest of the world’s exports?

JEFFREY BROWN: Now, on the domestic side, as we saw, he did put in this call for more action, more stimulus action, right, from the administration and Congress. How unusual is that, to kind of say it that clearly?

GREG IP: Well, if you will recall, his predecessor, Alan Greenspan, used to be criticized for speaking out a little too much on these issues, saying when we should cut taxes, when we should balance the budget.

And when Bernanke came in, he tried to studiously avoid these political debates. But I think what he is looking at is a situation now where what he can achieve by traditional means, such as lowering interest rates, is quite limited. And he would like to see the fiscal policy used to add some strength to the economy where he is unable to.

But it’s very risky. He is starting to wander into territory which is much more politicized.

JEFFREY BROWN: Well, OK. And he is in an atmosphere — and we see it now daily — where he is getting criticized, starting with this — the quantitative easing, which is criticized in some quarters, as we just saw, for the potential risk of inflation.

GREG IP: I think, when people hear that the Fed is printing money, they draw a straight line, saying that leads to hyperinflation, and they start imagining situations like Germany in the 1920s.

Now, first of all, that is analytically off-base, because printing money only creates inflation if the money gets lent and then gets spent. And neither of those things are happening right now. And, in fact, this week, we learned that underlying inflation is the lowest in over 50 years.

But there is another concern here, which is that, when the Fed buys bonds, it’s in essence financing the government deficit. Now, most economists think that is probably a necessary thing right now. A little bit of government borrowing and lower interest rates are just what the economy needs.

But there are some people worried that this is the beginning of a slippery slope towards essentially the government — or, I should say, the Fed — printing money to finance our deficits. And that raises a lot of red flags, especially among Republicans in Congress.

JEFFREY BROWN: Right. And that — and that — and that — those voices are loud and growing. And that seems to be leading to a question of the so-called mandate of the Fed, whether to change that, specifically, the historic mandate to deal with unemployment.

GREG IP: Yes.

JEFFREY BROWN: Now, explain the mandate and what people are saying now.

GREG IP: So, the Federal Reserve, in 1977, had its statute changed, so that it would have to focus thereon on achieving maximum employment and stable prices.

What the Republicans in Congress this week have suggested is that they just forget about the full employment part of that mandate, and just focus on the stable prices, the low inflation part of that mandate. Now, what is interesting here, it is not so uncommon to have Congress beating up on the Fed and threatening to change its mandate. It has been happening since the ’60s and the 1970s. As recently as the early 1990s, Henry Gonzalez wanted to like beat up on the Fed and expose them to more congressional oversight.

What is a little unusual here is that you normally see Congress getting upset when they want the Fed to run an easier monetary policy and create more jobs. They have a situation now where they actually would like the Fed to stop running such an easy policy. That’s a new one.

JEFFREY BROWN: Now, and, today, in fact, Treasury Secretary Geithner came out in an interview, and he said, no go. I mean, he is opposed to any kind of change of the mandate.

GREG IP: That’s right. And that is why I believe that this will be a lot of smoke and fire, but it will not actually result in any changes to the Federal Reserve Act.

Remember, the Democrats will have none of this. They want full employment to remain one of the Fed’s goals. And, by the way, I think most American do right now. If you look at the polls, they are much more worried about unemployment than they are about inflation.

That said, all this attention, it’s very unpleasant for the Fed, and it could make life quite difficult, especially now that the Republicans have — can have hearings in the House of Representatives, where they can air some of their concerns about the possible risks associated with this policy.

JEFFREY BROWN: All right. Greg Ip of “The Economist,” thanks very much.

GREG IP: Thank you.