A TALE OF TWO COUNTRIES

6/3/09

Obsequious Ben Bernanke, appearing today before the House Budget Committee, has let loose with two whoppers of brobdingnagian proportions. First, Mr. Bernanke stated that the Fed “will not monetize” the federal budget deficit. In what world can that can be a true statement? The Fed is buying government securities at a clip not seen in our country’s history. The Fed is buying long term treasuries, apparently in an attempt, so far utterly failing, to flatten the yield curve, for the first time in years and with a degree of enthusiasm that makes the woman on the Progessive.com insurance commercials look like the picture of insouciance. By very definition, the Fed is monetizing the deficit, and doing it to a heretofore unwitnessed degree.

Perhaps we can attribute even an iota of truth to Mr. Bernanke’s denial of monetizing the government’s debt by concentrating on tense, as in the Fed will not monetize the deficit, not that it has not monetized the deficit. For this attribution to be valid, however, one would have to conclude that Mr. Bernanke has been taking English lessons from Bill Clinton or is signaling a sudden policy change. The former is highly unlikely; Bernanke isn’t cool enough to hang out with Mr. Clinton, though one suspects he would like to be, hence forth the moniker I have attached to Obsequious Ben. The latter, while we can always hope, is even more unlikely.

The second of Mr. Bernanke’s failed sockdolagers is that the Fed was “involved very unwillingly” in the bailouts that have characterized the Bush/Obama administration’s approach to “capitalism” and “free markets.” Unwillingly? The Fed’s balance sheet has expanded by a factor of greater than three over the last year due to the too numerous to tally bailouts in which it has involved itself and the attendant and aforementioned monetizing of the deficit. “Unwillingly?” How does Mr. Bernanke behave when engaging in an activity willingly?

Meanwhile, across the Atlantic, yesterday saw German Chancellor Angela Merkel engaging in a very unGermanic activity: criticizing central banks. In a speech in Berlin, Mrs. Merkel asserted:

“I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line. (As something of a wordsmith, I admire the subtle backhandedness of that dig at the BOE.--MQ) We must return together to an independent (Emphasis MQ’s) central bank policy and to a policy of reason, otherwise we will be in exactly the same situation in ten years’ time.”

Lest you think Ms. Merkel’s comments were merely an instance of Germany’s historic xenophobia once again rearing its head, she also said that the ECB “bowed somewhat to international pressure” when it decided to buy $85 billion in corporate bonds, a step even the Fed has yet to take if one narrowly construes the definition of “corporate bonds.”

On May 12, Jurgen Stark, a German citizen on the ECB council, started this round of Teutonic criticism of the current state of central banking, warning that loose monetary policy of the type we are now seeing has helped build asset bubbles in the past.

Two observations are merited. First, while it is surprising that it is the Germans who are criticizing the central banks, the direction, if you will, of their criticism is not at all surprising. The Germans have some, in the great tides of history, relatively recent experience with the type of monetary policy Ben Bernanke, with the full complicity and encouragement of the Bush/Obama administration, has been conducting in the United States. So while it is a surprise that Germans, and German politicians, are criticizing world central banks, it is not at all unexpected that they would be criticizing the banks for being so loose.

Second, while our Fed seems to be spending half its time figuring out ways to put a supercharger on the printing press and the other half kowtowing to the political demands of the laughingly financially and economically obtuse solons on the Hill and in the Bush/Obama administration, the German chancellor and monetary authorities are urging more restrained monetary growth and a return to central bank independence. We import a lot of labor in our once great nation; perhaps we ought to consider importing some leadership.