Wednesday, January 14, 2009
Apparently they're not all singing from the same hymn book these days over at the Federal Reserve as Philly Fed President Charles Plosser has broken ranks with Fed Chief Ben Bernanke on how the central bank is using its massive balance sheet in what appears to be a never-ending attempt to save the world.
At this point, with things as bad as they've gotten, you have to stop and wonder, "Would it really be any worse if, from August of 2007 on, the Fed and the Treasury Department had done nothing?"
Maybe they would be worse, but we'd also probably be a whole lot closer to the end of this painful episode than we are now.
There seems to be a growing movement outside the Fed (if not inside) to rethink exactly what kind of a system they are running. At what point does the Fed stop buying up assets? Are there any limits at all to what the central bank can buy with the money it is now creating out of thin air?
More importantly, if the world does avoid another Great Depression, what will it look like?
This report at MarketWatch tells of one current Fed President and one retired one who are now asking these questions:
In a speech on Tuesday, Philadelphia Fed Bank president Charles Plosser publicly took issue with positions advocated by Fed chief Ben Bernanke.Along with Plosser, retired St. Louis Fed President William Poole wants the central bank to set a target for the size of the Fed's balance sheet and for reducing it, assuming financial markets improve. Poole goes on to compare the U.S. Fed with Communist Russia.
In a breathtaking innovation in monetary policy, the Bernanke Fed since the fall has not only expanded its balance sheet from $900 billion to well over $2 trillion in its efforts to restore the credit markets to health but has stopped offsetting the expanding bank reserves.
Plosser urged the Fed to "proceed with caution" with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.
"It is a huge disagreement," said Robert Brusca, chief economist at FAO Economics.
While the Fed chairman has made it a practice to run a more democratic central bank, the disagreements come at a crucial time when the Fed is striving to appear on top of the current financial market crisis and steep recession.
Underneath the surface is a real concern about how and when the Fed tries to exit from its new monetary policy.
Fed officials who pay attention to the money supply believe that the Fed's current policy of printing money never ends well and the danger of inflation is very high. They believe the Fed must withdraw the stimulus before there is any sign of inflation or it is too late.
If they really want to get under Fed Chief Ben Bernanke's skin, they should start asking what exactly is on the central bank's balance sheet like Bloomberg and, now, Fox Business News have done recently.
[Note: The photo above was not part of the original MarketWatch report and, yes, that's Ben Bernanke on the left - with the sword.]