The Monetary Policy of the US Federal Reserve: Rescuers Asleep
Not all the policies of Fed Chair Ben Bernanke are worth banking on.
It is the job of a national bank to deflate panic in times of crisis. That is exactly what the U.S. Federal Reserve did in 2008, after the investment bank, Lehman Brothers, crashed, and the system teetered. Fed Chair Bernanke deserves praise after his term for preventing a financial domino disaster.
Other measures, though, were not exactly on the money: the purchase of some $3.266 trillion in bonds, for example. The cost-performance ratio of this monetary action no longer holds true. Sure, the hundreds of billions of fresh liquidity oiled the finance market, but they had little real effect — especially on rising business investments. The collateral damage of this tactic is the reliance of the finance market on cheap money and a flood of capital, which has blown up bubbles of credit in emerging economies worldwide.
The pressing question, therefore, remains Bernanke’s, even after eight years: What should the Fed do when investors, drunk on cheap money, heat up the stock and real estate markets? Should they raise interest rates? Tighten rules and credit requirements? Twiddle their thumbs?
Bernanke and his predecessor Alan Greenspan have chosen the worst option — number three — and closed their eyes to financial excesses. We can only hope that Bernanke’s successor, Janet Yellen, manages to bring this failure to a conclusion.
It is the job of a national bank to deflate panic in times of crisis. That is exactly what the U.S. Federal Reserve did in 2008, after the investment bank, Lehman Brothers, crashed, and the system teetered. Fed Chair Bernanke deserves praise after his term for preventing a financial domino disaster.
Other measures, though, were not exactly on the money: the purchase of some $3.266 trillion in bonds, for example. The cost-performance ratio of this monetary action no longer holds true. Sure, the hundreds of billions of fresh liquidity oiled the finance market, but they had little real effect — especially on rising business investments. The collateral damage of this tactic is the reliance of the finance market on cheap money and a flood of capital, which has blown up bubbles of credit in emerging economies worldwide.
The pressing question, therefore, remains Bernanke’s, even after eight years: What should the Fed do when investors, drunk on cheap money, heat up the stock and real estate markets? Should they raise interest rates? Tighten rules and credit requirements? Twiddle their thumbs?
Bernanke and his predecessor Alan Greenspan have chosen the worst option — number three — and closed their eyes to financial excesses. We can only hope that Bernanke’s successor, Janet Yellen, manages to bring this failure to a conclusion.
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