FED stands ready, but does not make a change

In a closely watched speech in Jackson Hole, WY this morning, FED Chairman Ben Bernanke tried to boost investor confidence without announcing a new round of anticipated “quantitative easing” (QE). QE is an unconventional and controversial monetary policy in which central banks infuse a fixed quantity of newly created reserve cash into the economy by buying the assets of banks and “synthetically” inflating their value. In effect, this increases the money supply, and so long as banks begin lending again, stimulates economy activity. The policy is unconventional because it is a policy of last resort, and it has become the preferred way of central banks including the FED to address the ongoing financial crisis.

Quantitative Easing Explained (6 min. video)

The cartoon explanation is funny, but the facts on the ground are not so funny. Whether the FED has too much power over the economy, and whether it is good that its chair is insulated from democratic accountability, is a good independent question. After all, many people accused former FED Chair Alan Greenspan of having too much power.

However, in today’s political climate this means more direct politicization of this position, which is dangerous for the economy and American democracy. Gov. Rick Perry of Texas is now publicly brow beating and belittling Bernanke’s policies of economic stimulus. While on the campaign trail in Iowa last week, Perry said that if Bernanke “prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas.” He went on to say that if Bernanke printed more money, the act would be “almost treasonous in my opinion.”

Bernanke made clear in Jackson Hole that the FED stands ready to assist, and investors jumped at the news with the DOW climbing steadily all morning and the NASDAQ seeing some forward momentum. But with anemic job growth and investors wary of the political impasse in Washington, the economy continues to falter. The news swings both ways from day to day, leaving investors and markets in the schizophrenic position of changing their minds with the news cycle. Perhaps Bernanke’s speech has made investors excited about the prospect of more public aid in the service of private profit? Depending what’s on the news tomorrow, only time will tell. ::KPS::