It’s at times like these that Federal Reserve chief Ben Bernanke must wish he was back in the cozy confines of Princeton, trying out monetary notions on like-minded academics and students. Instead, there he was on Friday, once again thrust into the harsh glare of the global spotlight – a respected economic theorist who may no longer have enough clout to pursue further bold manoeuvres and who is fast running out of weapons anyway.
Nervous markets spent the week on tenterhooks waiting for Mr. Bernanke to dispense some pearls of wisdom at the annual gathering of central bankers and leading economists in Jackson Hole, Wyo. They were looking for anything that might dispel the clouds of uncertainty that have grown darker than at any time since the financial meltdown of 2008. A world awash in debt and facing the spectre of another recession was hoping against hope that Ben the Interventionist would show up, rummage through his bag of potions and pull out a confidence-restoring elixir.
The Wall Street Journal nicely summed up the situation with a mid-week headline: “Market Bets on Fed Miracle.”
It was at this very venue last year that Mr. Bernanke revealed Quantitative Easing The Sequel would be coming in time for the fall stock-buying season. But this time, instead of an all-in bet on QE3, we got something of an admission that the Fed has done about all it can and that it’s up to the politicians to get their fiscal house in order.
True, he did insist the central bank still has arrows in its quiver and that it’s “prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.” But that’s the sort of central-bank boilerplate we already get on a regular basis. And unlike Mr. Bernanke’s last starring role at Jackson Hole, he pointedly avoided discussing just what those options might be or what would trigger their deployment.
So we had a speech that clarified nothing, coupled with the news that the U.S. economy expanded in the second quarter by a mere 1 per cent and that American consumers haven’t felt so gloomy about their prospects since the grim days of November, 2008. Yet stocks climbed.
One reason may have been Mr. Bernanke’s comment that the next meeting of the Fed’s policy-making committee in September would be two days, instead of one, to allow for “a fuller discussion.” The markets took that as a signal that more Fed intervention will be on the table. But it could just as easily mean that internal divisions among policy-makers have grown sharper, making it a lot tougher to marshal support for more activism.
“It gives them more time for discussion,” says Doug Noland, a long-time critic of Fed policies, who expects increasingly contentious monetary easing will indeed be on that September agenda.
Mr. Bernanke “got locked into this strategy, and the experiment is going to continue,” says Mr. Noland, a senior portfolio manager with Federated Investors in Pittsburgh and an expert on credit bubbles.
He argues there is no proof the Bernanke experiment is working. Indeed, he points to an increasing body of evidence that it merely helped to inflate equity and Treasury market bubbles at home and other risk assets around the world. “These types of policies have hurt a lot. They have created a lot of instability. But he now is in a difficult situation. … As anyone who experiments, watch out when people start to turn against you.”
As an example, we have the bizarre utterance of Republican presidential hopeful Rick Perry, who declared recently that if Mr. Bernanke “prints more money between now and the election,” it would be “almost treasonous.” The Texas governor was justly assailed for the idiotic remark. But plenty of critics, including several Fed regional presidents, agree with the rest of Mr. Perry’s comments that “we have to learn the lessons of the past three years. They’ve been devastating.”
The hawks in the Fed’s ranks “have seen enough of this,” Mr. Noland says. “They don’t want the balance sheet to expand any more. They don’t feel comfortable.”
Mr. Noland has closely tracked U.S. and global credit excesses since the early 1990s. He issued dire warnings about the U.S. mortgage market as early as 2005 and signalled the current sovereign debt crisis in 2009, labelling it “the Global Government Finance Bubble” in his strongly worded weekly newsletter, the Credit Bubble Bulletin.
He warns, ominously, that the bursting of this bubble, starting in the peripheral euro-zone countries last year, is only in its early stages. “It hasn’t made it to the [U.S.] Treasury market yet. It hasn’t made it to the Japanese debt market. But these are all festering issues in a world of so much debt.”
So what should Mr. Bernanke and other policy makers be doing right now? “Their No. 1 priority should be protecting the creditworthiness of the heart of our credit system.” Instead, they’re doing the opposite, aggressively expanding government debt and monetizing a big chunk of it. “Once you go down that path, get ready, because the deficits are going to be enormous and unending.”
In his latest missive, Mr. Noland writes: “My hunch is that unfolding developments will likely catch a lot of very intelligent – and highly degreed – folks completely unprepared.”