The US Federal Reserve chairman Ben Bernanke has assured active monetary policy if the US economy remains fragile. At the same time he recognized the uncertainty of the economy and financial markets. After this testimony, financial markets fell. A recovering economy must overcome natural uncertainties of regrouping and reinvesting. Active monetary policy only adds to the uncertainty. Bernanke is an intelligent man though, why is he trying to put out a fire with oil?
The Fed has been using aggressive monetary policy, in an attempt to heal the markets, since about 2008. The low interest rates, loans to insolvent banks, and the purchase of toxic assets have not solved the problem. The biggest worries cited were unemployment and market confidence. Unemployment always lags behind economic recovery and may not be fixed with near zero interest rates. The unemployment issue could be remedied with increased investment, but that’s avoiding the real problem. Investment isn’t increasing for a reason, and that reason is not the interest rate. Market uncertainty is a plague on recovery. Without consumer and investment confidence, the process is slow and sometimes stagnant. However, certainty does not come from the government. Confidence comes from real returns. Sure, the first investors to step in the water bear substantially more risk, but that doesn’t mean they won’t step in at all.
Why then is Bernanke pushing such a radical policy? Well, a large portion of President Obama’s political legitimacy rides on the success of his stimulus and recovery polices. Speaker Nancy Pelosi and Senate Majority Leader Harry Reid have joined Obama in pressuring the Fed to follow an active economic recovery scheme. Also, Americans not only looked to regulators during the financial crisis, they looked at the Fed. The Fed is expected to maintain the financial system on an even keel. So, it politically behoves the Fed to seem actively involved and not to be thought sitting there doing nothing. Another speculation is his fear of deflation. As a student of the Great Depression, he knows the dangers to unemployment. However, regardless of the reasons, the US economy won’t recover through stimulus policies or cheap money.
