Is Bernanke’s QE2 an act of desperation?

An interview with Professor Tcherneva on Bloomberg radio’s The Hayes Advantage.

In his scholarly work Bernanke has clearly stated that governments like those in the U.S. and Japan (but unlike those in the European Union) do not have a solvency problem.

He also seems to understand that only fiscal policy produces net new financial assets in the private sector. By contrast, purchases of government securities by the Fed only replace interest-earning financial assets (bonds) with non-interest earning assets (reserves), leaving the net wealth position of the private sector unchanged. For this reason, Bernanke has argued that monetary policy is effective in deflationary periods mainly because of its fiscal components. In other words, the central bank can and should finance whatever size government spending is necessary to bring the economy out of a recession.

Yet, paradoxically, in his congressional testimonies over the last two years he has continually raised concerns with the sustainability of the debt and the deficit.

If Bernanke believes that the U.S. government cannot become insolvent and that fiscal policy should be allowed to dominate in recessions, why is he talking at cross purposes and fueling the misguided deficit hawk rhetoric about government spending? Where is the Chairman’s conviction about policy effectiveness and his commitment to the Fed’s dual mandate of full employment and price stability?

As a policy maker, he has failed to lend his support to any meaningful and sizeable fiscal response, which is why his latest QE2 move seems like an act of desperation.

All this and more is explained in Professor Tcherneva’s paper “Bernanke’s Paradox” (forthcoming in the Journal of Post Keynesian Economics) and her Bloomberg radio interview with Kathleen Hays on The Hayes Advantage.

13 responses to “Is Bernanke’s QE2 an act of desperation?

  1. Audio link is broken

  2. Hi Dr Tcheneva, The link to the radio interview doesn't work?

  3. The Bloomberg link appears to be broken

  4. Sorry for that. The link should be working now.

  5. I would like to see the FED finance a pay roll tax holiday. If we had more leadership from the Federal Reserve Chairman, it might happen. Reportedly, Obama, rejected this idea because he wanted to use the fear of the Republicans cutting social security benefits as a motivation for democratic party turn out in the recent election. Its seems all economic policy ideas coming out of the Congress or White house is based upon some kind of political calculus. This is why Federal Reserve chairmanship should be maned by a person who is a-political and in paradigm. Bernanke maybe in paradigm based upon his academic work but his policies as chairman seem to indicate a more political pro-Big-Finance bent. Meanwhile the public suffers at 10% unemployment and 20% underemployment.

  6. I'm reading Prof. Tcherneva's working paper and I'm finding it very interesting. I feel I have a fairly comprehensive understanding of MMT yet I'm still having trouble grasping one basic concept; that being the relation between bank deposits and reserve balances. It's difficult to read anything in the MMT field that doesn't reference reserve balances and the Prof. Tcherneva's paper is no exception. I feel that my inability to fully understand this concept is holding me back from a more complete understanding. Can someone point me to a link or publication that explains how the reserve system clearly works from a "nuts and bolts" operational perspective? For example, a bank (called Bank A) with $0 in deposits acquires deposits of $100 in cash from a customer. The reserve requirment is assumed to be 10%. The bank therefore must maintain $10 in reserve balances. Based upon my understanding, these reserve balances are held at a federal reserve bank. Does the bank physically deposit $10 in a reserve account at the fed reserve bank with Bank A's name on it? Does it go through ACH? If it goes through ACH what happens to the cash the $100 in cash held at Bank A? This is where I get lost. What are the operational transactions that underpin the movement of funds from the Customer who deposits cash into Bank A, to Bank A then establishing a reserve position at a Reserve Bank? Additionally, what are the mechanics when the one customer with the $100 deposit goes into Bank A and decides to withdraw the full $100? If the bank has only $90 in currency and $10 in "reserve balances" does the bank get those reserve balances returned from the fed reserve? I know this must sound like a simple or obtuse question but if someone would be kind enough to point me to an explanation or provide a simple, concise explanation, I would be eternally indebted. Thank you for your assistance.

  7. He is warning on the deficit to prepare for implementation of an already existing plan to drain QE2 liquidity by an aggressive policy of Austerity. If inflation suddenly erupts the Fed would be locked into a number of assets for which it has paid too much. To sell those assets when interest rats are rising would risk massive losses.As followers of MMT (some of you?) It should be obvious that spending and taxation can be used as an alternative methods of monetary policy. Austerity will follows QE2 as surely as thunder follows lightning.

  8. Anonymous,Arriving at the party late myself I struggled with this question until I found this:

  9. Interesting footnote in the paper. Can you provide more explanation?"Given the peculiar arrangement of these swap lines there is essentially no mechanism by which the Fed can take possession of the collateral that is backing the loans obtained by these foreign entities. Thus, a default on the dollar loans, especially in the Euro area, is not a far-fetched scenario."

  10. pebird, i believe this means that nations in EU can not create money at will in order pay back their obligations. Which means they must raise money through taxing or borrowing from those who already have euros. EU nations can default on the euro denominated obligations they have with each other leaving them insolvent.

  11. Someone should do an assets/liabilities T-chart diagram like Professor Kelton did recently explaining the effects of government deficit spending on private sector balance sheets for quantitative easing.

  12. This is what bothers me: MMT is all about the theory neutral operational aspects of Fed, yet the Fed chairman himself falls short when talking about the budget deficit. If the Fed chairman can't get it right then what hope is there?