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Ben Over?


Ben Bernanke seems to spend far too muck time on the Hill (I am sure he thinks so, too). Personally, I think it’s a bad sign when the Chairman of the Federal Reserve spends more time before Congress than at the office.

As usual at these highly-productive Congressional inquisitions cross-examinations, we learned a lot. We learned that Dr. Bernanke wants to help grow the economy and provide jobs, while also restraining inflation. Truly shocking stuff like that. He urged the Congress to “take care that the Federal Reserve remains effective and independent,” which is confusing until you realize that the word “remains” should be “becomes.” And Bernanke made the bold prediction that real interest rates will rise if deficit spending is not restrained.

I know the shop at 20th and Constitution is dedicated more to crisis planning these days, but if this is what passes for analysis at the Bernanke Fed then we may be in worse trouble than I thought. Of course, he is right that real rates will rise…but he is right about that mainly because real rates (that is, TIPS yields) presently are negative for the first four years or so of the curve and only 1.18% all the way out to 10 years. There’s little hope they will fall much further, and if they do fall then it means we are really in a pickle, economically speaking.

What the Chairman was trying to tell us is that deficit spending should, in theory, cause real rates to rise because the additional demand for credit should push the cost of credit higher, if the supply of credit is unchanged.

Of course, all of the rising deficits of the 1980s were associated with declining real rates, and the surpluses of the late 1990s with rising real rates, so the evidence here is, shall we say, something less than compelling. Moreover, thanks to the (so far, modest) decline in societal leverage induced by the economic crisis, credit demand is slackening elsewhere so it isn’t clear whether government borrowing is crowding out private borrowing, or replacing it. In any event, as I said earlier, Bernanke’s prediction is pretty safe given the starting point of real rates today.

***

I have been, as most conscious people are, critical of Bernanke’s actions as Fed Chairman, from his verbal gaffes with Maria Bartriromo to his preternatural fear about inflation right as it was plainly ready to collapse and his hijacking of the Fed during the crisis, bending it to do things the Fed was not meant to do. I am not alone in this; a Rasmussen survey found that the “common man” thinks 2:1 that Ben should not serve a second term. But it may surprise you to find that I say he should stay for another round. My reasons:

  1. You break it, you bought it.
  2. I don’t trust the Obama Administration to nominate anyone other than a political hack, and
  3. I don’t yet have enough material for Bernanke, My Butt.

I am pretty sure that, given another term, this last issue will be remedied.

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