The Fed Calls the Shots
Between the wall-to-wall AIG outrage this past week, plus leaks of the coming details from Tim Geitner’s latest bank bailout, you can be forgiven if you haven’t paused to reflect on what Fed Chairman Ben Bernanke did the other day. But in a week when all the other economic news was grist for either rage or tears, gentle Ben actually offered something creative, and even hopeful.
Bernanke’s goal was to disabuse people of the widely held view that when interest rates have already been lowered to near zero, the Fed has “run out of ammunition.”
Why do I say this? Ever since the financial crisis broke, I’ve been an advocate of what I call Spaghetti Economics—as in, if we throw trillions of dollars against the wall, enough will stick, however imperfectly, to avoid anything like a 1930s-style calamity. The fact that the pasta has been flying wildly for months—even via the much-maligned TARP—is the chief source of my optimism amid the mess. It’s a stark contrast to the period after the 1929 crash, after all, when monetary and fiscal policy ended up being insanely contractionary. That’s why the nitpicking over the stimulus bill always struck me as irrelevant—yes, there were some silly projects here and there, but its chief virtue was its outsize spaghetti factor. Yet comparatively speaking, Congress is a pasta piker. History will record that the spaghetti tosser-in-chief during this crisis was none other than Bernanke. And the latest trillion he threw this week to buy long-term Treasury bonds and other mortgage-related assets reminds us why we’re lucky to have a determined chef practicing Spaghetti Economics in the kitchen.
The Financial Times said Tuesday that “the plan to buy Treasuries caught investors off guard.” But not for those who’ve read Bernanke’s playbook. If you’re trying to follow the chairman’s thinking, the essential text is a speech he gave as a Fed governor back in November 2002 on the risks of deflation. Bernanke’s goal in the talk was to disabuse people of the widely held view that when interest rates have already been lowered to near zero, the Fed has “run out of ammunition” when it comes to boosting aggregate demand.
“To stimulate aggregate spending when short-term interest rates have reached zero,” Bernanke told the National Economists Club, “the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys... One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure—that is, rates on government bonds of longer maturities.”
This is precisely what happened Wednesday, when the Fed said it would start buying hundreds of billions of dollars' worth of longer-term Treasury bonds, sending long-term interest rates immediately lower. The other debt the Fed is buying up falls into categories Bernanke talked about back then as well, in language too abstruse to detain us here. But trust me, he’s being creative.
The point is this: Like any public official caught in an epic crisis, Bernanke has surely made mistakes. But he came to this moment, thanks to his longtime study of the Depression, almost providentially prepared to be unconventional and bold. I picture Bernanke with a list in his drawer of 25 big things he can do to stave off disaster. My hunch is he’s only run through the first eight or nine—which means there’s lots more pasta on the shelf in case we need it. What he’s thrown already has had a huge impact in stopping things from going from Very Bad to Even Worse.
There is one problem, however (besides potential inflation, which is a worry for another day). It hit me when I tried to explain what was happening to my daughter, who’s in sixth grade. She got the spaghetti analogy just fine. But it’s hard to explain to an 11 year old (and to adults, really) why, in a democracy, the man with the most influence over whether we get through this mess relatively intact is someone who was elected by no one, who few Americans know anything about, and who basically answers to his own judgment about how best to muscle us through.
Matt Miller, a senior fellow at the Center for American Progress, is the author of The Tyranny of Dead Ideas: Letting Go of the Old Ways of Thinking to Unleash a New Prosperity. He hosts “Left, Right & Center,” public radio’s popular weekly political roundtable, and blogs at mattmilleronline.com.