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"He's not kidding about printing money"

Monday, March 16, 2009

Fed Chief Ben Bernanke's appearance on 60 Minutes last night was notable for a number of reasons, the most important of which, in my view, was the rather casual commentary about "printing money" and "inflation" that may come back to haunt him. Here's the video:

It's a generally positive piece in which Bernanke goes a long way in "demystifying" the Fed and, of course, the headlines that were generated as a result all had something to do with his predictions for the end of the recession (probably this year).

But, it was the money printing sequence that captured my attention.

From the handy transcript (at about the eight minute mark in the video above) comes the following interchange with Scott Pelley:
Asked if it's tax money the Fed is spending, Bernanke said, "It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing."

"You've been printing money?" Pelley asked.

"Well, effectively," Bernanke said. "And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."

He's not kidding about printing money: the Fed issues U.S. currency, which is why it says "Federal Reserve Note" on all the bills in your wallet. The Treasury Department's Bureau of Engraving and Printing is just a few blocks from Bernanke's office. It prints the money at the Fed's request.

The Fed's mandate from Congress is to put enough money in the system for maximum employment, but not so much that it sets off inflation.
While few are giving much thought to what might happen when the actions taken by the Fed over the last year or so are reversed, at some point, that will become a critical issue.

Mindful of the "baby-steps" by his predecessor in 2004-2006 and aware of past precedent where too eager a response during a nascent economic recovery had snuffed out that recovery (such as in 1937), it is not likely that the central bank will err on the side of reining in their excesses too quickly due to inflation concerns.

That's when things will get really interesting.


albrt said...

Once the Fed has printed enough money to buy up all the bad debt, I don't see how they are going to reduce the money supply. When you lend money into existence, you can control the borrowers by raising interest rates. When interest rates go up, the marginal borrower would rather pay back debt than buy more things, thus reducing the money supply.

Once the Fed has printed enough money to buy up everybody's debt, they will be staring at a bunch of people who are holding lots of cash and very little debt. RIt will be the "global savings glut" on steriods, and there will be no way to mop it up other than confiscatory taxes. Which is certainly a possibility.

AJ said...

Assuming they actually have that sort of control over the money supply, everything should be peachy, right?

Perhaps every country will start printing money, and inflation relative to other countries will effectively keep the money supply constant.

Anonymous said...

"... we simply use the computer to mark up the size of the account that they have with the Fed."

So who benefits from this? I have a bank account, along with millions of other Americans, why doesn't the Fed use their computer to mark up the size of our bank accounts?

LOSERS: Those that were smart, prudent, and avoided debt get nothing but future inflation.

WINNERS: Those that were dumb, spent lavishly, and went deep into debt are being rewarded because the Fed is automatically wiring free money into their bank accounts.

If the fed wants to print money and perk up the economy why not send a check to every US household instead of giving money to the people that caused this mess?

Anonymous said...

While Bernanke attempts to explain the reasons for the economic meltdown, he fails to mention how much of the blame goes to the Federal Reserve and their easy money policies under Greenspan. Working productive Americans are bailing out the financial establishment that destroyed our economy along with 45% of the wealth in the world and now the American taxpayers and our children will be forced to live a far lower standard of living with reduced prosperity and opportunities due to this but only we pay the price.

Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. We believe a growing repudiate the debt movement could actually save our wealth and the markets and suggest this is a better alternative than Washington’s plans to monetize the debt in future years and tax and destroy our remaining wealth by depreciating the dollar.

The Campaign to Cancel the Washington National Debt By 12/21/2012 Constitutional Amendment is starting now in the U.S. See:

haljett said...

All I can say is get some gold while you can. Silver too. I just checked the free real time widget ExactPrice and both are trading at $925.30 and $12.98 an ounce on the comex.

Bernanke just admitted that inflation is coming and we all know that they are not prescient enough to stop it right away. If they were the FED would have kept this other crisis from happening. All they're doing is reacting.

Virtual real estate said...

Assuming they actually have that sort of control over the money supply.

Anonymous said...

Do give Bernanke some credit.
He solved one problem.!!.
He discovered a way to appear on National TV, without instigating a triple digit loss in the DOW Jones.

Just a thought...Bernanke would NOT estimate- when the recession will end,
unless he has high confidence in accuracy of his answer...

Think about it.

Smiley said...

As Krugman says about the liquity trap, it's about creating an expectation of inflation or a "credibly promise to be irresponsible".

But as this post demonstrates creating an expectation may be a bit tricky.

Actually I would have thought that doing something like increasing the minimum wage would be the most credible thing you could do.

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