There’s only one person who is right for the job as head of the Federal Reserve — and that’s Ben Bernanke.
I’m not saying this because Bernanke, who will be pushed out of that position in January, has done so well and should be rewarded. No, it’s because Bernanke has placed the US economy at incomprehensible risk with his untested quantitative-easing money-printing operation, and he should be required to see his experiment through to the end.
As you have probably told your kids more than once: “You made this mess, now clean it up.”
The central bank’s policymaking Federal Open Market Committee meets today and tomorrow to decide what to do next. The betting is that the FOMC will pull back slightly on quantitative easing — a process known as “tapering” — and buy fewer government and mortgage bonds from the financial markets. The feeling is that the Fed will stop the stimulus altogether sometime next year.
If you’ve been following the economy for the last few years, you already know that the Fed pushed down interest rates to near zero in the wake of the financial crisis five years ago to help the economy. But the response was muted.
Then the Fed went rogue with QE. It now buys $85 billion a month in government and mortgage bonds. Bernanke said long before he became Fed chairman that he would use QE if the economy ever got into a situation where asset values were declining, or deflation.
QE might not have been a bad idea at first. But once banks had been stabilized after the Great Recession of 2008, Bernanke kept QE going, to the applause of Wall Street.
The Fed now owns $3 trillion worth of bonds. The guessing this week is that it will reduce its monthly purchases to between $70 billion and $80 billion. So, in another year, the Fed will still add — at least — another $1 trillion to its QE bond portfolio.
What does Bernanke have to show for all that stimulus? He’s got an economy that’s growing only slightly — and even then in fits and starts. And another fit seems to be coming on as economic indicators suggest growth is again slowing.
Bernanke has also caused a historic shift in the nation’s wealth — away from people who have cautiously saved all their lives and toward the risk-takers. It’s the same old story: The rich get richer, and everyone else gets screwed.
In the decades ahead, someone will have to decide how to dispose of all those bonds without creating another financial crisis. Maybe one of your kids now in grammar school will be in charge of the big QE selloff.
Wall Street, of course, is smitten with Bernanke’s experiment, as it showed yesterday when stock prices rallied sharply because Larry Summers, who is basically despised by the financial community and — I’m told — by anyone else who has had the misfortune to meet him, pulled out of the race for Fed chairman.
If Summers had gotten the job, the rumor was that he might have tapered more quickly than Wall Street would have liked. So his demise is a good thing in the financial community’s view.
Who else can be Fed chairman? There’s Vice Chairman Janet Yellen, whom President Obama doesn’t seem to like. There’s also Tim Geithner, who, despite being a tax cheat, was Treasury secretary leading up to and following the financial crisis.
Geithner says he doesn’t want the Fed job — and really, who can blame him? If one day QE starts to work, Bernanke will get all the credit. If it continues to flop, the top guy at the Fed will get more than his share of the blame.
All blame and no glory is what the next Fed chairman has to look forward to.
There are also a whole lot of other insiders who are being mentioned for the job: a former Fed chairman now at the Brookings Institution, an American economist who recently resigned as governor of the Bank of Israel and another Fed vice-chair who is now chief executive of a huge nonprofit pension company that benefited from QE.
I’ll let you in on a little secret. Any of these candidates is as good as any other. Why? Because the decision on when to end QE will be made by the financial markets and not the Fed chief.
And that’s already happening.
A few months ago, foreigners eased off their purchases of US government securities. Nobody knows why, but it could have been because all the QE money being printed by the Fed is making foreign investors nervous about the stability of the US currency.
Take a look at the top 10 foreign investors in US government bonds, and you’ll see the problem. China owned $1.265 trillion in June, down from $1.30 trillion in May. Japan’s holdings have also declined, as has OPEC’s.
And Russia, 11th on the list, reduced the amount of US Treasury securities it owns to $138 billion from $143 billion.
When these big investors tell the Fed “enough” — and they might have already — QE will quickly come to an end, interest rates will rise substantially, and Wall Street will have to deal with it.
It would be nice if Bernanke was around to figure out what to do with his QE monster.