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.