April 3, 2013
Ben Bernanke, the Rodney Dangerfield of
Fed Chairmen
First it was 2012 presidential candidate Rick Perry, who
wanted to deal with Ben Bernanke’s money-printing “Texas style”. Then 2012
presidential candidate Mitt Romney indicated that Ben Bernanke had better have
his personal effects packed up and ready to move out of his Fed office by
January 21, 2013. And now it is David Stockman, who is mad as Hell and won’t
take
it anymore (see Mr. Stockman’s
rant in the March 31, 2013 op-ed section of the
New York Times, “
Sundown
in America”), the money printing of the Federal Reserve under the
chairmanship of Ben Bernanke being included in “it”. Similar to the late Rodney
Dangerfield, Ben Bernanke just can’t get no respect.
I actually agree with much of the political-economic
criticism vented by Mr. Stockman in his Times
op-ed. Yes,
government spending has expanded too much in the past four decades. And, to the
point of my rant here, the Fed’s
printing press was running too fast during most of the past four decades. When
Fed Chairman Greenspan was being described as a monetary-policy maestro by Bob
Woodward, yours truly was describing him more like the pied piper of Hamelin.
And yes, when Ben Bernanke was a mere governor of the Federal Reserve Board
under Greenspan’s chairmanship, he never once publicly dissented from
Greenspan’s bubblicious policies. But let he who is without sin cast the first
stone, Mr. “Supply-Side” Stockman. I believe in redemption. And I believe that
the money-printing that Ben Bernanke oversaw after the failure of Lehman
Brothers was and continues to be entirely appropriate unless a recession on the
order of magnitude of that of 1929-1933 would have been viewed as desirable.
Let me begin my defense of Ben Bernanke’s Fed
chairmanship post Lehman. Chart 1 shows the year-over-year percent changes in
quarterly observations of the loans, leases and securities on the books of
depository institutions – commercial banks, savings institutions and credit
unions – from Q1:1960 through Q4:2012. The median year-over-year percent change
in depository institution credit from 1960 through 2007, the year before Lehman
failed, was 8.4%, as represented by the height of the horizontal red line in
Chart 1. (As an aside, Mr. Stockman might want to take into consideration that
the Reagan supply-side miracle might not have been so miraculous had it not
been for the surge depository institution credit that coincided with it. Was it
marginal tax-rate cuts or rapid growth in depository institution credit that
worked economic miracles?)
But I digress. Notice
that from 1960 through 2012, there have been only two occasions in which the
change in depository institution credit was negative.
The first occasion was in the early 1990s, at the time of the S&L crisis.
You may recall that the economic recovery that started in the spring of 1991
was the first “jobless” recovery in the post-WWII era for the U.S. The second
occasion in which depository institution credit contracted commenced in 2009, soon after the Lehman failure. The contraction
in depository institution credit was more severe in the second occasion than
the first. As I have discussed in
previous commentaries, reasonable people can disagree as to what the optimum
rate of growth in depository institution should be and the 1960 – 2007 median
growth of 8.4% might not be the optimum, but I would argue that a contraction in depository institution
credit is sub-optimum. And that is
what we were experiencing for the most of 2009, 2010 and 2011. At 3.4%
year-over-year growth in Q4:2012, this remains a tepid increase in depository
credit in the context of the past 50-plus years.
Chart 1
Enter the quantitative policies of Fed Chairman Ben
Bernanke. Chart 2 shows the year-over-year percent changes of quarterly
observations in Federal Reserve credit, here measured by the monetary base. The
monetary base represents the cash reserves held by depository institutions and
the currency held by the public, both of which are created by the Fed figuratively
out of thin air. (This measure of the monetary base does not include the loans advanced to AIG following the collapse of Lehman
Brothers.) When Mr. Stockman and others refer to the Federal Reserve’s
money-printing operations, they are referring to the behavior of the monetary
base. From 1960 through 2007, the median year-over-year change in the monetary
base was 6.1%. From 1960 through 2008, the largest year-over-year change in the
monetary base was 12.6% in Q4:1999, as the Fed greatly enlarged the amount of
currency available to the public and depository institutions to accommodate the
increased precautionary demand for such in anticipation of problems that might
arise in connection with Y2K. (I still have tins of kippers that, to the
amusement of my family, I stockpiled in December 2009.) But that 12.6%
year-over-year increase in the monetary base pales in comparison with the
107.9% increase in Q2:2009. From the end of 2008 through the beginning of 2012,
the monetary base has, with one quarterly exception, grown far above its
1960-2007 median rate of 6.1%.
Chart 2
Horrors? Perhaps not. Credit evaluation and political
issues aside, there is no macroeconomic difference between the Fed providing
credit and the depository institution system
providing credit. Both create the credit they extend figuratively out of thin
air. Thus, when either extends new credit, the recipient of that credit can
increase its current spending and no other entity need decrease its current
spending. When the Fed purchases Treasury securities in the open market, the
cry goes up in some circles that the Fed is monetizing
the public debt. Yet, if the depository institution system purchases Treasury
securities, monetization alarm bells do not go off even though the
macroeconomic impact is the same. When the depository institution system
increases its net credit extension by granting more home mortgages, why don’t
we hear that private debt is being monetized? In a sense, the depository
institution system is an intermediary between the Federal Reserve and ultimate
borrowers in the economy. Again, credit evaluation and political issues aside,
in theory, the Fed could cut out the middleman, the depository institution
system, and directly grant home
mortgages, car loans and business loans to the private sector along with
creating credit for government entities. What I am getting at here is that the sum of Fed and depository institution
credit is what Mr. Stockman should be concerned with, not Fed credit in
isolation.
Chart 3 shows the year-over-year percent changes in
depository institution credit and the sum
of depository institution credit and Federal Reserve credit (the monetary base)
from Q1:1960 through Q4:2012. From 1960 through 2008, percent changes in the
sum of Fed and depository institution credit and depository institution credit
by itself does not differ much. It is starting in 2009 when the divergence in
growth rates is magnified. For example, in Q2:2009, depository institution
credit contracted by 0.5%, whilst the
sum of depository institution credit
and Fed credit grew by 7.0%. Recall,
it was in Q2:2009 that Fed credit by itself grew year-over-year by 107.9%.
Scary in isolation; not so scary when looked at in combination with depository
institution credit. Fed credit began to explode in Q4:2008 after Lehman
imploded. Yet, from Q4:2008 through
Q4:2012, the latest complete data, there has not been one quarter in which year-over-year growth in the sum of Fed and depository institution
credit has reached or exceeded the 1960-2007 median growth rate of 8.4% for
depository institution credit by itself. In fact, from Q3:2008 through Q4:2012,
the compound annual rate of growth in the sum
of Fed and depository institution credit has been a mere 3.6%. During this
same 17-quarter period, the compound annual rate of growth in depository
institution credit by itself was 0.4%.
Can you imagine how weak the pace in economic activity would have been
post-Lehman had the Fed not sped up its “printing press”?
Chart 3
I suppose Mr. Stockman would have preferred the Fed’s
policy in the early 1930s to Ben Bernanke’s. The Fed did speed up its “printing
press” after the stock market crash of October 1929, but not nearly enough to
offset the contraction in depository institution credit that took place. Chart
4 shows the year-over-year percent change in depository institution credit, Fed
credit and the sum of depository
institution credit and Fed credit for the semi-annual periods from 1929 through
1941. The shaded areas indicate periods of recession. Notice that during the
1929 – 1933 recession, there was an acceleration in the growth of Federal
Reserve credit, but not enough to prevent the sum of Fed and depository institution credit from contracting. In the four years ended the
first half of 1933, the sum of Fed
and depository institution credit contracted
at a compound annual rate of 7.5%. In that same time period, depository
institution credit by itself contracted
at a compound annual rate of 9.0%. The rebound in depository institution credit
starting in the first half of 1934, which corresponded to a vigorous economic
recovery, was due to several factors. The Banking Act of 1933 established the
Federal Deposit Insurance Corporation. This greatly reduced the threat of runs
on banks by depositors, which, in turn, reduced banks’ liquidity demand,
enabling them to increase their lending. The Reconstruction Finance
Corporation, established in early 1932, helped recapitalize the banking system,
again enabling banks to increase their lending. And the Fed increased bank
reserves, the “seed money” that the banking system
could multiply into a greater amount of bank lending. The sharp spike in the
growth of Fed credit/bank reserves that started in the first half of 1934 was
related to President Roosevelt’s decision to raise the dollar price of gold –
something that Mr. Stockman still is angry about. In 1936, the Fed began its
exit strategy from its accommodative policy. From the middle of 1936 to the
middle of 1937, the Federal Reserve began to “sterilize” some of the reserves
that it had created earlier by doubling the percentage of cash reserves banks
were required to hold against their deposits. This caused banks to contract
their credit outstanding and the Fed did not offset this bank credit
contraction with Fed credit expansion. This helped bring on the 1937 – 1938
recession.
Chart 4
In sum, I would argue that the “money printing” that Fed
Chairman Bernanke engaged in after the failure of Lehman Brothers was entirely
appropriate if the U.S. were to avoid a recession of the magnitude of that of
1929 – 1933. The Fed was merely creating some credit that only partially offset the contraction in
depository institution credit. Despite the rapid growth in the Fed’s balance
sheet starting in late 2008, combined
Fed and depository institution credit has been growing at a subdued pace when
compared with its behavior in the past 50 years. So, for now, let’s show Ben
Bernanke some respect for how he has managed monetary policy after the Lehman failure.
I have a hunch that there might be legitimate grounds to criticize the Fed
chairman, whomever that might be, in the next few years as he or she executes
the so-called exit strategy for monetary policy. If the exit strategy is not
guided by the growth in the sum of
depository institution and Fed credit, which by all indications it will not be,
then policy mistakes will be made and Mr. Stockman can write another op-ed for
the Times.
Paul L. Kasriel
Senior Economic and Investment Advisor
Legacy Private Trust Company of Neenah, Wisconsin
Econtrarian, LLC
1-920-818-0236
