Ben Confesses He Doesn’t Know How to Fly a Helicopter

Posted by Michael A. Kamperman on July 22, 2010

Federal Reserve Chairman Ben Bernanke gave a speech in 2002 in which he famously said that if it was necessary to prevent a Japanese style deflationary-depression the Federal Reserve could figuratively speaking “drop money from helicopters.”  Now, with a Japanese style deflationary-depression staring the U.S. right in the face, the man we placed in charge of the Fed confesses that he doesn’t know how to fly a helicopter.  His paper was theoretical after-all, and now he claims he is not sure of what the risks would be if his theory were put into practice.  He will place the theory into practice if there is another ‘panic’ and have the Fed resume aggressive quantitative easing.  But short of that he is content to watch this “unusually uncertain” economy and dither.  There is nothing uncertain about the economy.  We are in a deflationary-depression ala Japan.  We are repeating the policy mistakes of the 1930′s by focusing more on the deficit than on economic growth.  To this day the variables programmed into the Fed’s econometric forecasting model and most other econometric models are based solely on the post World War II inflationary expansion.  Hence, what is ”unusual” and causing “uncertainty” is the economy is not responding the way the models predicted.  Right now the Fed’s model anticipates unemployment will fall to 7.5% by the end of 2012 without any changes in Fed policy, tax policy, or stimulus policy.  To reach that target the economy would need to generate 7.5 million new jobs, which is an average of 250,000 new jobs per month for the next 30 months.  I must have missed where Washington D.C. jumped the gun on California to become the first in the nation marijuana tourist destination.  At least I hope these guys are smokin something, because it is depressing to think this is actually the best work they can do.  Mr. Bernanke, throw away the models and open your eyes.

Short of a ’meltdown’ the Fed is willing to take three steps to vigorously support the job market.  First, they are willing to say they will keep interest rates near zero for a really really long-time, rather than for just an extended period of time.  Wow, that should open up the job market.  Perhaps he should consider how effective this has been for Japan before relying on it as our next line of defense.  Second, the Fed might be willing to stop paying the Zombie Banks a quarter of a point interest on the one trillion dollars in reserves they have at the Fed in-order to jump start lending.  The WSJ detailed how many many small businesses are being asked to back their loans with cash, in many cases for the full amount of the loan, in addition to the equipment and real estate already pledged to the bank.  The Zombie Banks keep insisting that they are ready to make loans to all that qualify, which means if you give them the money to loan back to you you qualify.  Small business credit cannot get any tighter than this.  Again, hard to imagine the Zombies would open up the credit spigot if they were denied that 1/4% interest payment from the Fed.  Third, and this would help at the margins, the Fed is willing to re-invest the mortgage and bond payments it purchased back into the economy.  Right now those payments simply lower the Fed’s balance sheet and go back to money heaven.  They are neither saved nor spent in the economy.  Effectively, the Fed is currently tightening the money supply because all those mortgages payments are not being recirculated back into the economy.

Mr. Bernanke has already presided over an economic slide greater than the slide in 1930 at the start of the Great Depression.  Yet despite his reputation he lacks the wisdom and the will to head off either another slide mirroring the one in 1932, or a long drawn out nightmare mirroring the Panic of 1873 and the Two Lost Decades in Japan.  He should have told the Congress that the key tool under consideration is the Fed stands ready to support the Treasury market with aggressive purchases to back whatever fiscal stimulus policies Congress deems necessary to spur private sector growth.  There is a time and a place for everything, and now is the time to drop concerns about Fed independence and have the Fed and the Congress work together.  The housing market is terribly underwater.  Why not have a bail-out for the people instead of the Zombies?  Congress could offer to refinance and modify any existing mortgage in America for 4% with no credit check.  A home would be appraised and if the mortgage is underwater Congress would authorize the balance over and above the value of the home  to be paid off by the Treasury.  These mortgages started out no higher than appraised value.  All Congress would be doing is hitting the housing reset button.  Anyone with half a brain is not really worried about the debt or the deficit because they know the U.S. can print what it owes.  Democrats want social spending and they want the rich to pay for it.  Republicans simply want a strong national defense and to pay less in taxes.  Democrats are unwilling to cut out social spending to avoid a deficit.  Republicans are unwilling to pay higher taxes to avoid a deficit.  Both sides don’t want to pay in some way for the other sides issues.  The “tools” the Fed and the Congress need to fix the economy are simple.  The wisdom and the will are what seems like a bridge too far.