Ben Bernanke's $1.2 Trillion Bet
Monetary Policy: The Federal Reserve's plan to create $1.2 trillion out of thin air to buy Treasuries is a risky move, to say the least. If it doesn't boost output by an equal amount, the certain result will be inflation.
Desperate times breed desperate measures, and clearly that's very much on the mind of Fed chief Ben Bernanke. On Wednesday he announced the Fed will print money to buy U.S. Treasuries in unheard-of amounts — nearly $1.2 trillion.
This move, so-called "quantitative easing," is both momentous and perilous. With interest rates now at zero, it's the only real arrow in the Fed's quiver to fight a deflationary economy.
But why is the Fed doing this now?
An academic expert on the Depression, Bernanke no doubt understands that the government during the 1930s did too much tax-hiking, tinkering and regulating, and too little on the monetary side of things, and that this was a big reason why the economy collapsed.
He's well aware that other experts, such as Milton Friedman and Anna Schwartz in their monumental 1963 tome on U.S. monetary policy, laid much of the blame for the economy's collapse in the '30s on Federal Reserve wrongheadedness.
And indeed, since the Fed let money supply contract more than 30% as the economy plunged 27%, it's hard to argue that fact. Bernanke hopes to avoid the same mistakes.
That said, we face a far different situation today, with neither a GDP down 27% nor a quarter of our people out of work.
More appropriate, however, is the experience the last time the Fed tried quantitative easing in 1961—in the so-called "Operation Twist." According to the Fed's own later assessment, it failed.
In the end, what did work were the broad-based tax cuts pushed by President Kennedy and passed after his death. That's how that booming decade became known as the "go-go" years.
Perhaps Bernanke sees an administration and a Congress recklessly layering on new spending, new regulations and needless government programs that will inevitably slow growth and crimp productivity. Absent any real stimulus, such as tax cuts, he may feel quantitative easing is a risk worth taking.
Yet this is the equivalent of applying monetary policy with a set of defibrillator paddles. It carries a huge inflation risk — especially if, as Bernanke says, the economy's second-half recovery is a tepid one. That $1.2 trillion in new money will have to be paid for one way or the other — through taxes or higher inflation.
As for those who argue a major cash infusion is desperately needed to end our "credit crunch," we'd only note that credit, while tight, isn't close to being in a crunch. Consumer and business loans are running 7.7% ahead of last year, and total commercial bank lending is up about 4.8%.
In short, money is being lent, and the economy is perking up even without benefit of a federal bailout effort that could add $9 trillion or more to our national debt over the next decade.
It may be that Bernanke, a good economist, is tired of waiting for Congress and the White House to do what needs to be done and is moving to do what he can. If so, we applaud his courage and leadership. We just hope we'll be able to applaud the results.