James Galbraith on Ben Bernanke’s Press Conference and the Federal Reserve
Here is a prequel to Ben Bernanke’s press conference from James Galbraith. He seems to think that this approach is risky. But, in retrospect, Bernanke acquitted himself well. Gavyn Davies said it well:
- It was a success. After a hesitant start, the Fed chairman spoke calmly and authoritatively, explaining the Fed’s exit strategy much more clearly than the FOMC statement had managed to do. In fact, in the absence of the press conference, there would have been considerable uncertainty about what the statement actually meant.
- The tone of the press conference was widely judged to have been “boring”, which simply means that it was aimed more at the financial markets than at Main Street. This is a good decision by the Fed. They must not try to compete with politicians for the ear of the electorate. The ECB press conferences have never made this mistake, and nor should the Fed.
- The existence of the press conference will probably increase the importance of the chairman relative to other FOMC members. This has also happened in the case of the ECB and (to a lesser extent) the BofE. There will now be somewhat less opportunity for an opaque FOMC statement to be followed by a dozen speeches by individual members, with markets becoming confused about the true intentions of the committee, though this will still happen to some extent (see below).
- At present, the press conference has probably strengthened the hand of the doves, because the chairman is so clearly still in the dovish camp himself.
That goes to style though. I agree; Bernanke was poised and good on style. But what about the mechanics and the substance? Here are some questions from Galbraith that weren’t really asked or answered:
- Why do you think that lending at almost zero percent to banks and then having them lend that money back to the government at 2 or 3 percent is a good way of conducting monetary policy in a crisis?
- Why do you think that paying interest on reserves is the best way to control credit growth when the Fed exits from QE? Couldn’t you just raise reserve requirements and forego the interest costs that end up increasing deficits? Remember the Fed hands over its profit to the Treasury.
- Why do you think quantitative easing was anything more than a financial transaction? You took some bonds off the market and replaced them with cash. But outside of pumping up commodity prices and depreciating the dollar, how does this flow through to support underlying economic activity, the housing market or job creation?
Now Jamie maintains there is no chance that the US government is not going to pay off its dollar denominated debt. Is that really true. You do have people taking a political stance, saying this is what we need to threaten to do in order to force their political agenda. So I am a lot less certain of this than Dr. Galbraith.
A lot more in the video below. Note the talk near the end of how the Fed was warned as far back as 2004 that Lehman and others were taking on too much risk. The Fed dismissed this. Having read my post asking Do The Facts Really Matter?, you know why.