You need to know that when Bernanke says “costs,” he means “risks.” And in describing costs, he sometimes actually uses the work risks, as he does here: “A third cost to be weighed is that of risks to financial stability.” But in some cases he uses the word cost when he means risk, as next: “A fourth potential cost of balance sheet policies is the possibility that the Federal Reserve could incur financial losses should interest rates rise to an unexpected extent.” Most of us speculators would call this a risk of loss, not a cost. Bernanke’s an economist, which explains his confusion here. Most economists don’t know finance. They long ago banished us finance types to business schools.
Now to the main point: Bernanke admits he’s gambling:
“In sum, both the benefits [returns] and costs [risks] of nontraditional monetary policies [QE or LSAP] are uncertain; in all likelihood, they will also vary over time, depending on factors such as the state of the economy and financial markets and the extent of prior Federal Reserve asset purchases. Moreover, nontraditional policies [huge inflation of the monetary base] have potential costs [risks] that may be less relevant for traditional policies.”
By the way, when Bernanke wants to emphasize risk, so as to make QE (LSAP) seem a good idea, he uses the term risk, not cost:
“central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks.”
“the need to take out insurance against the realization of downside risks”
5:43 pm on September 1, 2012
