As the testifier-in-chief for the Federal Reserve Bank, Chairman Ben Bernanke, appears before a lot of congressional committees. These meetings amount to a lot of political posturing by congressmen making political speeches in the guise of questioning the “witnesses” that appear before them. Occasionally, to keep up appearances, a real question breaks out of the fog. The “witness” must then answer.
Professor Ben has become a master at this process. In response to the occasional question he responds with a pre-programmed bit of Fisherian nonsense about maintaining “price stability” and “full employment”—the dual mission of the Fed. The congressmen nod their heads, as if it makes sense, and proceed.
In all fairness, occasionally a congressman asks a question that deserves an answer. I have heard one or maybe two congressmen ask the important question about what the Fed plans to do with its bloated balance sheet once the economy starts to recover.
In response, Chairman responds, with a straight face, that they will take action to “sanitize” the balance sheet at the appropriate time and that it will have no deleterious effect on the economy.
I find this claim interesting, coming from the same man who says he did not anticipate the severity of the current down-turn. I guess that he means they can predict an up-turn in the economy with a level of precision that entirely escapes them when predicting declines.
All of this begs the question: How the hell will you do it?
The chart below shows a profile of the assets of the Federal Reserve Banks from 2002 to March 2009. You can see how, in early 2008, Ben Bernanke and his partner Tim Geithner, turned the Fed into their monetary playground—all in the name of preventing a financial crisis.
(Don’t worry if you cannot read the detail. You will still get a sense for the magnitude of the change.)
As one who thinks they should not mess with the money supply at all, I will leave determining their relative success to others for now. I only have one question for the two financial wizards:
Do you really think you can dismantle this mess without having a significant detrimental effect on the market?