Bernanke has arguably done better than central bankers in Europe, Britain and Japan in terms of his crisis response. Having avoided the fiscal cliff, Congress still has to confront the separate debt ceiling. Concern still grows over the growing public debt that government isn't doing much about.
By Jeremy Warner
8:50PM GMT 09 Jan 2013
The last seven, crisis-ridden, years would already have completely finished off a lesser man. The poor chap must be exhausted.
It is perhaps still too early to be passing judgments on his reign, but on one level it certainly doesn’t seem so bad, given the challenges faced. Bernanke has arguably done better than central bankers in Europe, Britain and Japan in terms of his crisis response. US GDP is back above pre-crisis levels, unlike the UK, and is continuing to grow at a reasonable, if quite modest, rate.
Having avoided the fiscal cliff, Congress still has to confront the separate debt ceiling. This will involve the same sort of “end of days” media frenzy we saw around the cliff, but ultimately a deal will be done and the US economic juggernaut will move on.
The negative impact on confidence of these stand-offs seems to be much exaggerated. In fact, the US economy continued to create jobs at quite a pace right through the supposed uncertainty of the fiscal cliff negotiations.
How much of this is down to the genius of “helicopter Ben” is, of course, another matter. One quite powerful contributor to recent growth has been the “fracking” gas revolution, which is delivering cheap energy worth perhaps as much as 1pc of GDP a year to the US economy. There’s no objective way of measuring the extent to which aggressive money printing by the Fed has contributed to the US turnaround.
The general assumption, confirmed by a number of self-serving Federal Reserve working papers, is that it must have done, since America avoided a repeat of the Great Depression and now seems to be mending quite rapidly.
Whatever the truth, one thing is for sure. It is really quite hard to justify further rounds of money printing given the evident recovery that is now taking place. Even so, Mr Bernanke has indicated he’ll keep the printing presses at full throttle at least until unemployment sinks below 6.5pc. This is a mistake, with some possibly quite malign unintended consequences for both the US and world economies.
Like others, I was a strong supporter of the initial burst of “quantitative easing”, both in the US and the UK, when it seemed a very necessary tool for combating the collapse in the financial system and the accompanying, violent, contraction in credit.
And by targeting the “toxic” loans of failing banks for asset purchases, the Fed seems to have practised a rather more effective form of it than we saw in either Britain or Europe. As Bluford Putnam, chief economist of CME Group, has argued in a paper for the Review of Financial Economics, buying up these assets has helped the US banking system rebuild capital and liquidity much more rapidly than has occurred in either the UK or Europe, enabling a return to balance sheet growth.
In Britain, by contrast, QE has almost exclusively targeted government debt, which has been very helpful to the Government in helping to fund a still burgeoning fiscal deficit at very low interest rates — and in keeping the bankers in bonuses — but has failed to restore health to the banking system and seems increasingly ineffective in stimulating demand in the real economy. We’ll reserve judgment on “funding for lending”.
Meanwhile, the European Central Bank largely spurned asset purchases altogether and instead focused on long-term liquidity facilities. Solvency issues in the European banking system have therefore remained substantially unaddressed, preventing meaningful economic recovery.
Even so, the injection of central bank liquidity seems to have done a relatively good job in preventing catastrophe. Yet whether QE can continue to be justified after the financial system has been stabilised is much more questionable. The trouble is that today the purpose of QE is no longer really that of depressing interest rates or preventing a collapse in the money supply, but that of attempting to support aggregate demand.
Growing concern over mountainous public debt has left governments increasingly reliant on the supposed miracle remedies of monetary policy to restore economic growth. Monetary policy has become the only game in town, so much so here in Britain that the Government has elevated faith in the easy money policies of the Bank of England to cult-like status. Britain has blazed the trail, the Prime Minister once boasted, as “fiscal conservatives but monetary activists”. Regrettably, and perhaps predictably, the cult of QE has failed to deliver the goods.
Of course, it is possible that things might have been even worse without it, but the longer it goes on, the less likely this seems, and meanwhile some quite counterproductive long-term consequences are starting to emerge.
Some of the wider adverse consequences of QE have been brilliantly elucidated in a paper for the Dallas Federal Reserve by William White, former economic adviser at the Bank for International Settlements. Since Mr White was one of the few monetary gurus to have accurately highlighted the dangers of the credit bubble when it was still possible to do something about it, his analysis deserves some attention. His main conclusion is that there are limits to what central banks can do, and that monetary stimulus has essentially already hit the buffers. The consequences of persisting are therefore quite likely to be negative from here on in.
These negatives include misallocation of capital likely to prove quite harmful to growth in the long run. For instance, easy money encourages banks to keep existing debtors afloat even though they might be insolvent, thus denying credit to new businesses and younger households. This “evergreening” of long standing debtors creates an army of weak, zombie-like customers.
What’s more, QE results in some very undesirable distributional effects. Those able to afford it are charged higher interest rates than otherwise, while debtors are constantly favoured over creditors. The previously profligate are rewarded, and the thrifty are punished, creating moral hazard on a grand scale. Easy money in response to a crisis can also generate serial bubbles, with each action setting the stage for a later crisis.
But perhaps worst of all, it encourages governments to do nothing. One possible defence of QE is that it at least buys time for governments to engage in debt reduction and structural reform to redress imbalances and increase potential growth.
Unfortunately, this time is not being well used. To the contrary, QE has become an excuse for doing nothing and carrying on as before in the Micawber-like hope that something will turn up. By allowing governments to borrow more cheaply, it also positively encourages irresponsible spending. Oh, what a tangled web we weave
To see original article CLICK HERE