Here's What's Preventing Bernanke From Saving The Economy

bernanke gun

The debate continues over what, if anything, the Fed should be doing to further stimulate the economy.

The key thing to remember is that most of the conventional tools to stimulate are used up. Bernanke would have to get creative.

But can he?

Well, yes, in the sense that the Fed can probably come up with an unlimited number of ideas to further pump money into the economy.

The problem is political.

James Hamilton at Econbrowser makes the correct point, regarding any attempt to target higher inflation:

The way to do the same thing in a bigger way is of course to raise the implicit penalty on idle cash through inflation. Whenever I make this point, some readers respond that I am proposing to turn America into Zimbabwe or steal the earning power of honest workers. If I as a modest blogger face such reactions, I can understand the difficult public-relations tightrope act faced by the U.S. Federal Reserve.

Inflation is regarded as evil, and even if Bernanke thought that a higher inflation target were the answer, the reaction would likely be brutal.

And what if he wanted to get even more creative than that?

Economics of Contempt discusses:

[I] also suspect that the Fed is reluctant to do more because the last time they went out on a limb and took extraordinary/unorthodox actions — bailing out AIG, establishing currency swap lines, supporting the money market funds — they were eventually savaged by politicians and the press for those actions. (And, mind you, the multiple investigations into the AIG bailout have turned up nothing legitimately untoward.) Even though the Fed was right to do those things, and they undoubtedly helped stave off a complete financial meltdown, grandstanding politicians and commentators badly misrepresented the Fed’s actions in a (partially successful) effort to “rein in” the Fed’s authority and autonomy. Reining in the Fed’s ability to undertake extraordinary actions during a crisis became an explicit goal of both Republicans and Progressives during the financial reform debate.

If this is the reaction the Fed can expect when its extraordinary/unorthodox actions work, who knows what would happen if the Fed tried something unorthodox and failed. And I think this scares the Fed. They don’t want to establish any unorthodox programs, for fear that politicians eager to ride a wave of populist sentiment will make another run at the Fed’s authority and independence (or even the Fed’s existence).

Doing what’s needed — and again, this is presuming that monetary stimulus is what’s needed, which obviously isn’t a slam dunk — just may not be possible, even for the presumably independent Fed.

In fact, the mere fact that eliminating Fed independence (kind of, courtesy of the audit-the-Fed movement) has already come up, is a sign that Fed independence is dead already, causing Bernanke’s hands to be tied.

Don’t miss: 13 signs the economy has hit a brick wall >

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