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.
November 3, 2010; 2:55 PM ET |
Federal government leadership
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