Ben Bernanke appeared on 60 Minutes this evening and gave what I believe is an excellent interview. He explains in great detail why he is still very concerned about deflation and the weak economy. Perhaps most importantly, however, he explains why QE2 is in no way inflationary:
“Well, this fear of inflation is way overstated. One myth that’s out there is we’re printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying treasury securities. And by lowering interest rates we hope to stimulate the economy to grow faster.”
Of course, this all sounds very familiar to regular readers. We’re clearly in the minority in believing (in fact knowing) that QE2 is not inflationary, but where I disagree with Mr. Bernanke is that he can actually control the long-end of the curve. In fact, I believe the rising interest rates of the last few months are clear proof that QE is the non-event I have always maintained that it is and that it will not help the economy is any substantive way.
He goes on to explain why the government can always control short-term interest rates and why the economic recovery remains far from self sustaining. He also says the deficit should not be cut in the coming year. The one problem point in the interview comes when he discusses how the banking system caused the great depression. Although the credit markets were a clear contributor to the crisis and the Great Depression they were not the causes. Both crises were human crises and not banking system crises. Mr. Bernanke continues to misunderstand this. The real fix needs to occur on Main Street and not on Wall Street.
He’s very humble and honest in admitting that he totally missed the financial crisis coming. He admits that lending standards were too loose and comes close to admitting that the deregulation of the financial industry contributed to the crisis. In addition, he says there is a growing divide between the rich and the middle class that is having a destructive effect on the country. It’s baffling in many ways because he seems to grasp so many of the issues that are important here, however, his incessant focus on saving the banks is where his great flaw remains. He appears to know that the financialization of this great country nearly destroyed it, yet he remains fixated on protecting these same companies that helped contribute so greatly to the crisis. It should be obvious to him that there is a great flaw in his thinking…..
All in all it’s nice to see an open and honest perspective from the Fed Chairman. I still don’t think Mr. Bernanke quite has policy action correct, but he’s certainly making strides in the right direction. The full interview is attached:
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.