Bernanke statements to TIME editor


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This is a recent statement by Chairman Bernanke regarding the ‘exit strategy:’

Federal Reserve Chairman Ben Bernanke sat down on Dec. 8, 2009 with TIME managing editor Richard Stengel, Time Inc. editor-in-chief John Huey, TIME assistant managing editor Michael Duffy, and TIME senior correspondent Michael Grunwald for a conversation on everything from the state of the economy to the contents of his wallet. Here is an extended, edited transcript of the interview:

Ultimately, if the economy normalized, and the Fed took no action, the banks would take those reserves, try to lend them out, and they would begin to circulate, and the money supply would start to grow. And then, ultimately, that would create an inflationary risk. So, therefore, as the economy begins to recover, and as we move away from this very weak economic environment, the Federal Reserve is going to have to pull those reserves out of the system.

In fact, the causation is that loans create deposits in the banking system. Reserves are not involved. So even if the banks advanced $2T in loans tomorrow, excess reserves of $2T would still be there. Sadly, it seems to be a case of senior Fed officials who no doubt more than understand this obvious point not feeling comfortable enough to discuss it with the Chairman in casual conversation and bring him up to speed on banking and reserve accounting.

He also made the following statements, indicating he had no idea that, functionally, ‘putting capital into banks’ is nothing more than regulatory forbearance, and that the banking system- the some 8,000 regulated and supervised public/private partnerships already in place to do the bidding of the Fed- could have just as easily been used to make the loans and buy the securities in question. Instead, the Fed has burdened itself with the logistics of accounting for the multi thousands of individual mortgage backed securities it currently has in its Maiden Lane and other portfolios that are also currently removing over $50 billion in income from the ‘non govt.’ sectors:

This immediately became relevant, because in mid-October, the crisis heated up again to the point that we thought that we were again within days or hours of a collapse of many of the largest financial firms in the world. It was a dramatic weekend. It was Oct. 10 or 11, Columbus Day weekend, when the Finance Ministers and the central bankers of seven of the largest industrial economies had a meeting here in Washington, which, of course, I attended. Usually, those meetings are very scripted and very dry. In this case, there was palpable concern among the participants that the collapse of their financial system might be just days away, and there was a great deal of discussion about how we, collectively, as the policy makers leading those countries could stop the collapse.

In the days that followed, countries all over the world, particularly the advanced industrial countries, took strong measures to prevent the collapse of the financial systems. That included putting capital into banks; it included preventing the failure of large financial firms; it included guaranteeing the debts of financial firms so they could borrow and keep themselves afloat; it included making short-term loans to firms so that they would have the short-term credit they needed to pay off lenders who were withdrawing their funding. And, again, this was the U.S. doing this, but also many of the most important industrial countries around the world simultaneously, including the U.K., Germany, France, Switzerland and others.


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7 Responses to Bernanke statements to TIME editor

  1. warren mosler says:

    Hard to say what he’s thinking. I think he realizes the FOMC sets the fed funds rate by vote, and the NY Fed will keep it at that level, regardless of reserve levels.

    Reply

  2. Is it true to say that banks are not reserve constrained, but only ASSUMING the central bank is determined to control interest rates? I.e. what Bernanke could be saying is that come the need damp down economic activity, he intends withdrawing reserves; and if banks still go ahead and lend more, that will drive up interest rates. But I, Bernanke, won’t be bothered: this interest rate rise will be deflationary, which is exactly what I want.

    Question 1: could that be what he is saying? Question 2: would the above policy make sense?

    Reply

  3. Dave Begotka says:

    This is the best reason I can find why this stuff happens over and over again.

    http://www.youtube.com/watch?v=_GfZnd2GWgk

    Hard to swallow?

    Warren did you guys take down one of my posts? Or did I fail the math test AGAIN!

    Reply

  4. Ramanan says:

    Hi Warren,

    Was a pleasure to meet you. Liked the 100 minute workshop and would have liked it to go on for another 100.

    Reply

  5. warren mosler says:

    Like that quote a lot- will use it, thanks!

    Good to see you in Australia!

    Reply

  6. Ramanan says:

    Hi Warren,

    One observation about Mario’s excellent point. Galileo once said, “By denying scientific principles, one may maintain any paradox.” One can change this for Bernanke/mainstream and say “By denying accounting principles, economists can maintain any paradox”

    Reply

  7. warren mosler says:

    Dear Warren and Marshall,

    Absolutely correct! What is astonishing is that Bernanke is completely inconsistent with the framework of the so-called “New Consensus” models to which he and Taylor et al. have subscribed over the years. Admittedly, this doesn’t surprise me since, while at the PK conference in Dijon, France, last week, even some so-called “Post-Keynesians” were confused about the nature of quantitative easing. It’s amazing how people could just slip back into some monetary vestige of the past … much like sleeping zombies.

    All the best wishes!

    Mario

    Reply

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