Above is the full video of the press conference held by Fed Chairman Ben Bernanke held last week -- Thursday, September 13, 2012 -- as he announced yet another in a long line of "unprecedented levels of policy accommodation in recent years" (0:01:46).
In our previous post, entitled "Growing the economy, part one: Get off of a 'War Footing' with monetary policy," we argued that the Fed's unprecedented levels of accommodation over the past four years were inappropriate and in fact harmful. We also promised to discuss why the Fed continues to take this approach, and because the Fed really went "all-in" on that approach last week, it becomes even more important to understand what is behind their actions.
As Mr. Bernanke explains in his opening remarks at the press conference in the video above, the Fed has in its job description something called the "dual mandate," which is to use monetary policy to ensure both price stability and maximum employment. With government measurements of unemployment still stubbornly above 8%, the Fed is compelled by this second part of their dual mandate to take additional steps to try to reduce unemployment.
In this regard, Mr. Bernanke and the Fed can hardly be criticized: their job description includes taking steps to ensure full employment, and unemployment remains at 8.1%, well above "maximum employment." Never mind the fact that their control over the tools of monetary policy gives them precious little in the form of tools that can actually create employment -- it is in their mandate, so they have to do something with the tools they have, as inappropriate as that may seem.
To fix that mandate, lawmakers should get rid of it, by amending the Federal Reserve Act (in fact, the dual mandate was only added by Congress to the Federal Reserve Act as recently as 1977). We have previously published our view that the dual mandate should be abolished (see this previous post, for example).
In his opening remarks, Mr. Bernanke makes reference to the fact that what is really needed in this situation are not monetary tools but rather fiscal tools, and we agree. All the monetary accommodation in the world will not induce businesses to hire and expand if misguided fiscal policy (set by policymakers in Congress, not the Fed) imposes enormous burdens to hiring and expanding, by increasing the costs of employee health insurance, increasing the regulatory burdens and penalties aimed at businesses, increasing government activity in areas that were previously addressed by private businesses, increasing the taxes on business activity or making the threat of increased taxes seem more likely, and increasing government's spending to the point that future taxes seem even more likely.
Therefore, in order to unleash economic growth (and improve the employment picture at the same time), we need to fix the broken fiscal policy coming out of Washington lawmakers. As distinguished economist Dr. Walter Williams points out in his most recent syndicated column, fiscal policy (the power to tax and spend) is the responsibility of the Congress, not the responsibility of the Fed, and also not the responsibility of the President.
In the video below, Brian Wesbury (another economist with whom we agree), explains why he believes the Fed's action yesterday can be called "QE3," why it is misguided, and why it is the fiscal policy that must be fixed if the economy is going to grow:
He also provides some additional thoughts on the reasoning behind the Fed's incredible new tactic of telling the public that interest rates would remain essentially at zero until at least the middle of 2015 (this is what the Fed now calls "forward guidance"), while initiating additional balance sheet activities (often called "quantitative easing" as explained in this previous post) that it will continue until levels of unemployment fall.
At about the 2:30 mark in the above video, Mr. Wesbury points out that -- in addition to trying to fulfill their dual mandate -- the Fed officials may also be trying to correct the difference between the current rate of nominal GDP growth and the rate of nominal GDP growth that had prevailed before mid-2007. However, as Mr. Wesbury insightfully observes, that is a terrible mistake! That would be, in Mr. Wesbury's words, "trying to get GDP back to where it was in a bubble time!"
This brings us to our final point for today's post. The bubble to which Mr. Wesbury refers was primarily a bubble in housing prices and housing activity, and it was a bubble that was almost entirely created by . . . misguided monetary policy after the previous recession and bear market!
All of this shows the folly of trying to use monetary policy to "steer the economy," as the 1977 dual mandate requires by law, and as yesterday's Fed announcements clearly indicate the Fed is trying to do once again. We have written about the dangers of such "Fed steering" many times in the past.
As Mr. Wesbury argues beginning at about 1:30 in the above video, the biggest deterrent to economic growth right now is "bad fiscal policy: too much spending, too many regulations, fears about future regulations [. . .], and fears about future tax hikes -- all of that is holding back the economy, and its not a lack of money that is the problem."
We couldn't agree more.
