The Authority of Ben Bernanke
By Arnold Kling
In The Atlantic, Roger Lowenstein makes the case for bowing to the authority of Ben Bernanke. This a cover story, and the cover photo of Bernanke makes him look like a serene, benevolent emperor. There is no substantive argument to justify this beatification, other than the usual “things would have been much worse” mantra. If you didn’t know better, you would think that liberal progressives take their moral stands solely on the basis of tribal loyalty and reverence for authority.
On the other hand, the classic video Quantitative Easing Explained (The Bernank), which seems to have been made by someone with libertarian inclinations, does not show reverence. It has two substantive points.
One is that “the deflation” was not a legitimate fear. Indeed, if you look at the deflator for personal consumption expenditures, it increased at an annual rate of 2.17 percent from 2000 to 2005 and 2.13 percent from 2005 to 2010. (By the way, Scott, if you take out “housing and utilities,” inflation actually was slightly higher in the latter half of the decade than in the first half.) So, if you want to say that “the deflation” was a legitimate fear, you have to fall back on the mantra, i.e., that we would have had deflation were it not for Bernanke’s heroics. (data source: 2012 Economic Report of the President and my calculations.)
The second point made in the classic video is that open market operations are a handout to the dealer banks. Suppose the government is going to spend an extra $100 that it does not have, and it will finance this by printing $100. In practice, it borrows $100 from “the Goldman Sachs” by issuing a bond, prints the $100, then pays “the Goldman Sachs” to get its bond back. This second method of funding the deficit is costlier to the government, but yields profits to “the Goldman Sachs.” It also yields profits to the Fed, because the Fed is the agency printing the money, while the Treasury is the agency issuing the bonds. However, from a taxpayer’s point of view, the Fed’s profits are a wash (all of the Fed’s gains come at the expense of the Treasury), and the only net impact is the income transfer to “the Goldman Sachs.”
The Fed’s response to the financial crisis was to massively increase the size of its balance sheet, thereby massively increasing the income transfer to private financial institutions. In addition, in order to keep this additional money from leaking to businesses or consumers in the form of loans*, the Fed introduced a policy of paying interest to banks on reserves. This increased the value of the transfer from taxpayers to financial institutions.
(*note that an increase in loans is what you would have wanted to happen if you were really worried about “the deflation.”)
But do not try to tell the readers of The Atlantic that the benign emperor lacks clothing.