Bernanke Fibbed His Way Through '60 Minutes'

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Ben Bernanke
ought to write country music songs on the side. They would all have
the same theme: I cheated on you honey, but take me back one more
time.

His appearance
on “60 Minutes” on Sunday, December 5, was clearly his attempt to
deal with criticism of the Federal Reserve’s policy of purchasing
up to $600 billion of Treasury debt – or more, as he admitted.

As part of
his justification of his policy – and it really is his policy
– he argued that the unemployment rate will not otherwise come
down.
The
unemployment rate is just not going down. Unemployment is just about
the same as it was in mid-2009, when the economy started growing.
So, that’s a major concern. And it looks that at current rates,
that it may take some years before the unemployment rate is back
down to more normal levels.

This is a
good public relations approach. The public is legitimately concerned
about unemployment. The fact that the government two days before
had announced an increase from 9.6% to 9.8% made this issue the
main one that the interviewer, Scott Pelley, wanted to talk about.
Bernanke did, too.

He is positioning
the decision to implement the stimulus as necessary to avoid years
of high unemployment.
Between
the peak and the end of last year, we lost eight and a half million
jobs. We’ve only gotten about a million of them back so far. And
that doesn’t even account the new people coming into the labor force.
At the rate we’re going, it could be four, five years before we
are back to a more normal unemployment rate. Somewhere in the vicinity
of say five or six percent.

His sales
pitch – for that was what it was, and is – rests on the
assumption that, by lowering the 10-year T-bond rate from 3% to
(say) 2%, the FED will provide an enormous boost for business. Businessmen
will rush into the labor market and begin hiring people.

Why? Why should
demand for T-bonds give confidence to businessmen and bankers that
the economy is about to recover across the boards?

LOWER
T-BOND RATES: SO WHAT?

Pelley is
not an Austrian School economist. He was therefore not in a position
to ask Bernanke the really tough questions. The toughest question
of all is this one:
Why
do you think that a reduction of the 10-year T-bond rate, if it
even happens, will be sufficient to get banks lending again and
businesses hiring again?

He had the
opportunity to ask this. He got close to Bernanke’s jugular with
this question:
The
major banks are racking up profits in the billions. Wall Street
bonuses are climbing back up to where they were. And yet, lending
to small businesses actually declined in the third quarter. Why
is that?

Bernanke had
to admit that this has been the case. More than this: the refusal
of banks to lend has been the reason why there has been neither
a job recovery or mass price inflation. But Pelley did not follow
up, and Bernanke skirted the issue.
A
lot of small businesses are not seeking credit, because, you know,
because their business is not doing well, because the economy is
slow. Others are not qualifying for credit, maybe because the value
of their property has gone down. But some also can’t meet the terms
and conditions that banks are setting.

This is indeed
the case. Then the question should have been this:
Then
why will your plan work? If T-bond rates are at historic lows, yet
small businesses will not or cannot get loans, what will an extra
percentage point off the existing rate structure for the Treasury
do for private industry?

He of course
did not ask this. Instead, he asked:
Is
this a case of banks that were eager to take risks that ruin the
economy being now unwilling to take risks to support the recovery?

That’s not
too bad a question. Better yet would have been this:
Since
we know that the Big Four banks – Morgan, Citigroup, Bank of
America, and Wells Fargo – have over 50% of the nation’s assets,
what did they do with the FED’s bailout money, which enabled them
to make record-setting profits?

That would
have been impolite, even though the statistic is accurate. (http://bit.ly/BigBankAssets)
So, Bernanke spun a self-serving fantasy scenario.
We
want them to take risks, but not excessive risks. We want to go
for a happy medium. And I think banks are back in the business of
lending. But they have not yet come back to the level of confidence
that, or overconfidence, that they had prior to the crisis. We want
to have an appropriate balance.

Here is the
goal: Goldilocks lending. Not too cold (what has been taking place
so far), not too hot (not enough loans to convert monetary base
inflation to M1 inflation and then price inflation), but just right!

He wants the
public to believe that the FED can achieve this perfection, despite
the fact that the FED’s economists did not see the recession coming.

Well,
this fear of inflation, I think is way overstated. We’ve looked
at it very, very carefully. We’ve analyzed it every which way. One
myth that’s out there is that what we’re doing is printing money.
We’re not printing money. The amount of currency in circulation
is not changing. The money supply is not changing in any significant
way. What we’re doing is lowing interest rates by buying Treasury
securities. And by lowering interest rates, we hope to stimulate
the economy to grow faster. So, the trick is to find the appropriate
moment when to begin to unwind this policy. And that’s what we’re
gonna do.

Ah, yes: the
appropriate moment! At that moment, the FED will reverse its policy.
He promises – cross his heart – that the FED will know
when to reverse policy.

The next question
that Pelley should have asked was this:
When
you reverse the present policy, why won’t the economy go right back
into the recession that the FED’s total of $2 trillion in asset
purchases, 2008-2011, supposedly will have overcome?

The
FED made its announcement on November 3.

On that day,
the 10-year T-bond rate was 2.67%. One
month later, on Friday, December 3, the weekend of the interview,
the rate was 3.03%.

In short,
one month after the FED’s announcement, the 10-year rate had climbed
by 13.4%. I would hardly call this a ratification by the bond market
of the FED’s interest rate-cutting program.

HE MISINFORMS
WITH GUSTO

Let’s review
his statement again.
We’re
not printing money. The amount of currency in circulation is not
changing. The money supply is not changing in any significant way.
What we’re doing is lowing interest rates by buying Treasury securities.

To which Pelley
might have responded:
Excuse
me, professor. The 10-year T-bond rate fell from just under 4% in
late 2009 to 2.7% in late 2010, yet the monetary base was stable,
year to year. The FED bought nothing, net. In other words, the FED
did nothing, yet the rate fell. Now you say that the FED will do
something to lower rates – buy T-bonds – and will continue
to do this, yet rates have started back up. How do you explain this?

This is the
question that Bernanke has been trying to avoid. The explanation
is here: “The money supply is not changing in any significant way.”
Why is the money supply no higher? Because the banks are not lending.
But if they are not lending, because of excess reserves held at
the FED, then the fall of T-bond rates had nothing directly to do
with the FED’s monetary policy. It had everything to do with its
payment of interest, however low, to banks that increased their
excess reserves at the FED. If the FED ever imposed a fee to hold
both excess reserves and vault cash, the banks would start lending.

Then the man
had the audacity to announce this:
We
could raise interest rates in 15 minutes if we have to. So, there
really is no problem with raising rates, tightening monetary policy,
slowing the economy, reducing inflation, at the appropriate time.
Now, that time is not now.

To which Pelley
might have asked:
Excuse
me, professor. If T-bond rates fell while the Federal Reserve did
nothing for a year, and are now rising after the Federal Reserve
has promised to buy T-bonds, exactly what could the FED do that
would raise T-bond rates in 15 minutes?

Bernanke wants
the public to believe that the FED can produce miracles at no cost:
digits into jobs. He says this is not inflationary.
We’re
not printing money. The amount of currency in circulation is not
changing. The money supply is not changing in any significant way.

Technically,
the FED is not printing money – currency – but that response
is deliberately deceptive. The M1 money supply has not changed in
any significant way. Over the last year, the monetary base also
did not change. The FED says it will increase the purchase of T-bonds
by $600 billion. Where will it get the money to do this? Not a printing
press, but its functional equivalent: the legal right to create
digits in a computer. If this is not the functional equivalent of
a printing press, then where will the FED get the money to buy all
that debt?

Pelley did
not pursue this, because he is not an economist. Let us hope that
Ron Paul is allowed to pursue this, beginning next year.

THE
CONFIDENCE MAN

I especially
enjoyed this exchange.
What
we’re trying to do is achieve a balance. We’ve been very, very clear
that we will not allow inflation to rise above two percent or less.

Pelley:
Can you act quickly enough to prevent inflation from getting out
of control?

Bernanke:
We could raise interest rates in 15 minutes if we have to. So,
there really is no problem with raising rates, tightening monetary
policy, slowing the economy, reducing inflation, at the appropriate
time. Now, that time is not now.

Pelley:
You have what degree of confidence in your ability to control
this?

Bernanke:
One hundred percent.

The man is
so sure. He is so confident. The man was equally sure in May of
2007 that the housing market was secure. Let
us enjoy this blast from the past.

The
rise in subprime mortgage lending likely boosted home sales somewhat,
and curbs on this lending are expected to be a source of some restraint
on home purchases and residential investment in coming quarters.
Moreover, we are likely to see further increases in delinquencies
and foreclosures this year and next as many adjustable-rate loans
face interest-rate resets. All that said, given the fundamental
factors in place that should support the demand for housing, we
believe the effect of the troubles in the subprime sector on the
broader housing market will likely be limited, and we do not expect
significant spillovers from the subprime market to the rest of the
economy or to the financial system. The vast majority of mortgages,
including even subprime mortgages, continue to perform well. Past
gains in house prices have left most homeowners with significant
amounts of home equity, and growth in jobs and incomes should help
keep the financial obligations of most households manageable.

THE
THREAT TO THE UNEMPLOYED

Bernanke
did his best
to scare viewers regarding the long-term effects
of unemployment on workers. The longer that an unemployed worker
is out of a job, he said, the more rusty he becomes. This rustiness
begins to threaten his job prospects.
The
other aspect of the unemployment rate that really concerns me is
that more than 40 percent of the unemployed have been unemployed
for six months or more. And that’s unusually high. And people who
are unemployed for such a long time, their skills erode. Their attachment
to the labor force diminishes and it may be a very, very long time
before they find themselves back in a normal working position.

Think about
this. He is talking about six months out of the labor force. In
that time, he says, the person’s skills begin to erode. This depends
on the nature of the work. If it is hard physical labor, he will
get out of shape. But he can get back in shape pretty fast.

In a job requiring
technical skills, the technology will not pass him by. Companies
do not upgrade software that often. What Bernanke did not say was
this: The mindset of the unemployed worker will move from confidence
to lack of confidence. That is the big threat, not dexterity with
a piece of software.

The
real threat is to a person’s self-image. To get back into the job
market, he will have to take a pay cut. He is now competing with
younger workers who will work for less. He also is facing competition
from his peers, who also got laid off. His ability to persuade an
employer to take him on as a replacement for someone who was let
go has declined.

If he is out
for two years, his technical skill sets are likely to erode. Here
is the threat. No one imagined in 2008 that this could happen to
him. Now it has.

CONCLUSION

Bernanke had
no problem fielding Scott Pelley’s questions. He will have a lot
more trouble fielding Ron Paul’s, beginning in 2011, assuming the
Republican House Establishment allows him to take over as chairman
of the subcommittee on monetary policy, and also forces Bernanke
to testify before that subcommittee.

If it doesn’t,
then we will know for sure that the Republican Establishment is
no more a threat to the banking cartel than Barney Frank was.

December
8, 2010

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible
.

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