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What if Bernanke didn't get it right?

All eyes may have been on the election yesterday, but today, many have been glued on Ben Bernanke. The Federal Reserve announced a dramatic effort to help jumpstart the economy by purchasing another $600 billion in long-term Treasury bonds through mid-2011, a monetary policy that goes by the fancy phrase "quantitative easing." The number was higher than the $500 billion economists estimated.

The Fed's move could be successful, boosting employment through easing lending. But it could also do too much, producing too much inflation or more of the sort of bubbles that got us into this downturn in the first place; or too little--banks are already sitting on more than $1 trillion in reserves and aren't lending enough as it is. If that happens, it could make it look like the Fed is "out of bullets," as the Post's Neil Irwin wrote Monday.

In other words, if the Fed's move fails, Bernanke could find himself in a precarious position: he could be in danger of looking like he's running out of options, a position no leaders want to find himself in. As David Shulman, senior economist at the UCLA Anderson Forecast, told Irwin, such a failure could "give a sense that either no one is in charge or that the people who are in charge can't get it right."

We somehow hold faith that our leaders will get us out of our worst crises. That's especially true when it comes to subjects the average person is fuzzy about, like monetary policy and "quantitative easing." While Bernanke has come under fire for his management of the Fed--for one, some Fed watchers say dissension among Bernanke's ranks has prompted it to lose credibility--he did make moves that saved the country from a second Great Depression. And as last night's election shows, most of the finger-pointing on the shape of the economy is at Obama and Democrats in Congress, rather than the Fed.

But if this move fails to jolt the economy, more blame could end up falling on Bernanke. He has already reduced the target for short-term interest rates to zero, depleting the Fed's traditional first line of defense. And this is the second time he's pumped vast amounts of money into the economy--between early 2009 and March 2010, the Fed spent $1.7 trillion to do the same. If Bernanke's move doesn't work, many will surely be looking for what's next, and as the criticism of the Fed showed earlier today, no one seems to be in agreement on what that should be.

He does have a few more options, reports the Wall Street Journal, though they may not be good ones. If economic circumstances are considered "unusual and exigent" enough, it might be able to buy corporate bonds. And if today's move shows some success, the Fed could expand it further. In its statement, the Fed said it would "continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary."

Those tools may provide further tests for how good Bernanke is at improving the economy now that the worst has been averted. But as with any leader in a crisis, Bernanke's real test will be winning the perception that he has enough tools at his disposal to get it right.

By Jena McGregor

 |  November 3, 2010; 2:55 PM ET |  Category:  Economic crisis , Federal government leadership , Government leadership Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
Previous: Does 'the first 100 days' concept really matter anymore? | Next: Obama's post-election tightrope walk

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Posted by: itkonlyyou362 | November 6, 2010 9:29 PM

The Fed answers to no one, but I do recall who appointed this one and Greenspan. We're definitely playing a dangerous game and we're seeing some of the benefits and drawbacks immediately.

Commodities will jump through the roof and conveniently most of the prices for goods that will be pushed up don't show up in our "calculations" for inflation which will lower the standards of living for those who don't earn their living from investments.

Seniors are going to eat it big time. I can't say they don't deserve it after Tuesday.....but they'll never know what and why they'll find themselves eating pet food by this time next year.

Posted by: theobserver4 | November 4, 2010 5:27 PM

For Hebe1, do you really mean to fine corporations who lay people? That's penalizing companies doing what's necessary to survive! That will really get more people employed, won't it? Just do away with the corporations who employ thousands. That will show them! You are delusional if you think that will work. I'll bet you like Pelosi, too.

Posted by: panamajack | November 4, 2010 1:15 PM

While reading on other internet sites I have to say many in America did not take Bernanke's news well. They are now preparing for financial Armageddon believing Bernanke just tipped our economy into a terminal spiral descent to h*ll. I hope they are wrong but sadly Bernanke hasn't been right about much in the last couple of years.

Posted by: Desertdiva1 | November 4, 2010 11:45 AM

Get rid of the Fed.

Posted by: cavatellie | November 4, 2010 11:31 AM

So basically if you have a secure job, some money, and are looking to buy a house or other large purchase, this may help you.

If, however, you are suffering from the economy, it will not. In fact, if those who do have money don't take out loans, then the situation will become worse.

I can't wait to hear about how consumers aren't spending enough for Christmas!

I mean seriously, start penalizing large companies for laying off workers! Penalize all corporations, including the government for any part-time or temporary positions that do not offer insurance.

Stop telling the people, who ARE experiencing a depression, to just take out loans and buy more.

We've seen how that doesn't work! The average person is not going to spend or take out loans when they are not employed or are underemployed or concerned for their job.

Enough of this giving to those who already have! I'm not asking for money; I'm asking for some common sense, which apparently isn't taught in the Economics Department at Princeton.

Posted by: hebe1 | November 4, 2010 10:13 AM

Did you really mean...What if Bernanke got it wrong..AGAIN?

Posted by: wesatch | November 4, 2010 9:49 AM

Bernanke payoff. I wonder if the economic stimulation would have gone forward had Democrats retaken the Congress?

Posted by: berneredfeather | November 3, 2010 10:20 PM

(From the 11/3 Washington Post Opinion)

But what does the announcement mean for your personal financial situation? Here are the key things to know:

If you are thinking of buying a house or refinancing a mortgage, the new action helps you. The Fed is pumping money into the economy by buying Treasurys, which has already pushed down long-term interest rates, including for mortgages.

If you have significant investments in the stock market, it helps you. Lower interest rates on bonds have already prompted investors to bid up stock prices.


If you live on a fixed income, such as a pension that does not adjust for inflation, it hurts you. Part of the Fed's goal is to push inflation a bit higher than its current ultra-low rate of around 1 percent. In effect, higher prices without inflation adjustment shave off real income.


If you rely on interest payments as a major source of income, it hurts you. Lower interest rates cut cash flow for Americans who live off payments from bonds, CDs or other fixed-income investments.


If you travel abroad frequently, or consume lots of imported goods, it hurts you. In anticipation of the Fed's effort to reduce long-term interest rates, currency investors have been selling off dollars in recent weeks. So, the dollar has already weakened relative to other major currencies.

Posted by: shadowmagician | November 3, 2010 9:55 PM

What if Bernanke didn't get it right? When has he been right?

http://market-ticker.org/

Posted by: truth2 | November 3, 2010 9:37 PM

Ben Bernanke is wrong. He has been wrong about his entire approach for over two years now. But I am not going to put up Top Secret sensitive compartmented data on a newspaper comment and then have some idiots run around DC going, "Eureka! Eureka!", because in their enthusiasm to take credit for my work they will end up creating a worldwide panic. lol.

No. I am going to see if the Leaders of the House Republicans and I can start talking face to face, like grown ups (obviously the new Speaker of the House will automatically have clearance the moment he's Speaker), and see if we can come to a suitable arrangement that will allow me to fix this. lol.

Until then there is very little Ben Bernanke can do that will make things any worse or any better, he's pumping fuel into an engine that broke down and won't start. This isn't about some brilliant idea or magic bullet that will fix the economy, nor about two dimensional thinking that economists are limited to by their two dimensional math, its about a complicated four dimensional multilevel process (that matches the four dimensional real world) to fix the complicated four dimensional multilevel system (made up of multiple competing global systems) the most brilliant mathematicians of the 20th Century designed back in the '60s - if you could see and understand it the way I do you'd realize these guys were real smart, Einstein may have gotten all the fame but these guys quietly built an Empire the sheer size of which the rest of the World haven't realized yet. lol.

Posted by: darkasnight1234 | November 3, 2010 9:03 PM

The first step in any discussion of our current economic problems is accepting the fact that their history extends over the past decade. The clearest facts of that history are the trade deficit and the loss in manufacturing jobs. Other facts are the collapse of technology stocks in 2000, the problem of unemployment during the 2002 2003 downturn, the, at least in the last 100 years, unprecedented bubble in housing prices, and the rising cost of petroleum. The reality is that neither jobs nor the stock market have shown any sustained growth over the past decade. The best that can be said about the Federal Reserve is that their extreme policies have done nothing to fix these problems. The more realistic assessment is that the extreme Federal Reserve policies in the early part of the decade played a significant part in the destabilization of the American Financial system that set the stage for the 2008 crisis. It is certainly true that it is important to have a Federal Reserve ready to sustain a functional financial system in a financial collapse like the one that happened in the fall of 2008. But the Federal Reserve policies to manage the economy with interest rates that target some rather arbitrary measurement of inflation and unemployment simply do not work. The best that can be hoped for from the latest even more extreme effort is that it does not do too much harm. The deflationary pressures on real estate and wages in large sections of the economy are strong enough that the Federal Reserve probably will not be able to inflate them. But all that money is going to go somewhere. The most likely result is some kind of bubble in asset prices and more obscene profits into the pockets of those Wall Street speculators who are most expert at playing the Federal Reserves policies. Some of the money may cause havoc in foreign asset markets as well. Some of the Tea Party types do seem to be outraged by the Federal Reserve. So perhaps the election will serve to reign them in. Of course the downside of that possibility is that the Federal Reserve might not be able to play its required role if another 2008 style crisis was to appear.

Posted by: dnjake | November 3, 2010 8:21 PM

As the author states, the banks have over a trillion in reserves and aren't lending enough - so now they'll have over $1.6 trillion and that will spur lending?

I would imagine Mr. Bernanke is more concerned with deflation - and this new policy would be an attempt to increase the money supply and increase inflation. The real cure would be less unemployment (aka jobs) but that's not the Feds area of expertise.

Posted by: shadowmagician | November 3, 2010 6:07 PM

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