Federal Reserve Chairman Ben Bernanke testified to both houses of Congress over the course of two days this week. I watched most of the re-runs on CSPAN and picked out a few points from his testimony that I really liked and want to highlight; there were a few moments in which he almost sounded like Scott Sumner.
In both bodies Bernanke fielded questions and conjecture regarding whether the QE3 program is causing disruptions in markets, particularly risking asset bubbles and his response was conceptually consistent in all cases. He remarked that: 1) there is plenty of room to debate the role monetary policy plays in the formation of asset bubbles, but he does not see a clear link; 2) bubbles are hard to identify just on the basis of price changes; and 3) if there were some areas that could be identified as a possible bubble issues, regulatory policy is likely a better tool to address those issues than monetary policy because of its ability to be more precise.
In another case he was asked about the impact of QE on bond markets and the cost of rising interest rates in financing government debt. Bernanke had an assortment of responses, but they were also conceptually consistent. He said that: 1) a weak economy and high unemployment is making the government debt burden worse; 2) solving that problem will help problems with markets (getting back to stability and a sense of normalcy) and relive pressure on the debt. In other words, making more taxpayers by growing the pie is better for everyone.
Lastly, I really liked Bernanke’s response about how to unwind the size of the Fed’s balance sheet. I really liked it because, if I had to guess, I would say that he actually loosened policy even more by saying that a likely option would be for the Fed to hold its securities and let them run off. That does not sound at all like a Fed Chairman who is interested in aggressively tightening policy any time soon considering that the Fed is now buying longer term Treasuries in the QE program, in addition to the effect Twist had on rebalancing of the Fed portfolio also toward longer dated securities. That is not a commitment to permanently increasing the monetary base, but is very close.
It wasn’t the mea culpa or an aggressive push to change the Fed’s mandates to NGDPLT that I think is optimal, but Chairman Bernanke, if sincere, has come a very long way in changing his mind set in less than a year. I find it refreshing after having been worried about whether he was serious about a need for the Fed to change course.
This doesn’t mean he is completely off the hook in my view, however. I think that it would be much better for him to lead the discussion away from the “low interest rates = easy money” fallacy. But he is still trying to communicate to people in those terms, even when interest rates are not indicative of the stance of monetary policy. The points that he made during his testimony that I have highlighted here could be made with more clarity and would be more understandable if he could move his audience away from that confusion up front.
Bernanke does, indeed, have a long way to go in forming a more rational basis for the conduct of monetary policy. But for now, I am quite satisfied that he is on the right track and has done an amazing job of marginalizing the FOMCs “loose cannons on deck.”
Thank you Mr. Bernanke!
PS: A little video to show how much my outlook has improved since listening to Bernanke’s testimony:
PPS: It’s a large improvement over this, my form of righteous indignation (Dee Snider takes down a bubble fearmonger):