Simple question: if Congress is comprised mostly of non-businessmen/economists, how can they effectively question the policies and merits of Federal Reserve Chairman Ben Bernanke? Given there are more TV and radio personalities (6) than business people (5 accountants) in the 110th Congress, questioning the man who makes some of the most important economic decisions of the country seems a bit pretentious and misguided. Ben Bernanke earned his BA in economics summa cum laude from Harvard and his Ph.D. from MIT, where he studied the economic cause-and-effects of the Great Depression; very helpful when trying to stave off massive economic downfall.
So what? So he’s an academically gifted man who has proven his merit in the classroom. Why should I care what degrees he has hanging on his office wall if the current state of the US economy isn’t so hot? Simple: without the intervention of the Federal Reserve and Ben Bernanke’s policies, the US economy would be a lot worse off. Congressman Paul Ryan (R-WI) challenged Bernanke this week during a Congressional hearing where the House Budget Committee, chaired by Rep. Ryan, questioned the worth of the recent Fed stimuli designed to improve US economic health.
Representative Ryan’s comments regarding the inflationary costs of the stimulus stood on shaky ground at best and appeared to channel more of the GOP’s recent “all government sucks” mantra versus true economic tenets:
“These costs may come in the form of asset bubbles and price pressures. We are already witnessing a sharp rise in a variety of key global commodity and basic material prices, and we know that some producers and manufacturers here in the United States are starting to feel cost pressures as a result.” – Rep. Ryan.
He made sure to dramatically waive about a copy of the Wall Street Journal to prove his point; as if Fed Chairman Bernanke didn’t know about the global situation already.
Anyone who has taken ECON 101 can tell you that supply and demand guide the market. While the Fed’s interest rate policy and monetary stimuli play into that, the Fed’s policies do not directly control global inflation. How are rising food prices in China the effect of low American interest rates? (Hint: they’re not directly correlated with one another.) Interest rate hikes don’t increase food supply, the real culprit of food inflation in the emerging markets and somewhat here in the developed world.
Interest rate activity, which is part of the Fed’s recent and second quantitative easing strategy (commonly referred to in the media as QE2), most directly affects the rate at which financing is available. According to the Taylor rule, a monetary-policy that guides a central bank’s interest rate to control inflation, the interest rate the Fed should set right now should be negative. Since the Fed cannot lower their interest rate, the Federal Funds rate, any further because it would cause it to go negative, they must embark on quantitative easing (i.e. buying Treasuries) to effectively push interest rates lower.
Think about the supply/demand note from above: if the Fed purchases Treasuries, it will force interest rates down as the supply of Treasuries is reduced, thus making it easier for consumers to finance mortgages, cars, TVs, etc. Since 70% of US GDP is driven by consumption, this has a positive effect on the economy by allowing people to buy products with cheaper financing.
While it may not entirely feel like it, we stand on a precipice where we could tumble back into deflation instead of running into inflation. While things like food and gas are increasing in price, those represent just a fraction of goods the average US consumer pays for. The other, larger components (house, transportation, etc.) are still on the fence and would tip into deflation if interest rates move appreciably higher. Deflationary pressures would have a negative effect on the economy and would likely push us back into another recession.
Crap! I don’t want to go back into recession, how can we avoid this? That’s easy my friends: keep interest rates low so capital can flow freely through the veins of the reawakening giant that is the US economy. If the Fed and Ben Bernanke didn’t pursue a course to keep interest rates low through a low Federal Funds rate and QE2, there is a strong possibility the economic recovery would have stalled and tipped the economy back into recession.
I guess to put it more succinctly: shut up Paul Ryan.
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