Give Bernanke A Break

It seems as if the right wingers I read have been highjacked by the Austrian school. I don’t know why this is. In the Republican heyday in the 80s, it was supply siders and monetarists at the helm, not guys like Ron Paul and Peter Schiff.

Regardless, Ben Bernanke, chairman of the Federal Reserve, has gotten himself in trouble with the Republicans and Tea Partiers alike for his recent round of quantitative easing. Here’s a quick wiki definition of quantitative easing:

Quantitative easing (QE) is an unconventional monetary policy used by some central banks to stimulate their economy. The central bank creates money which it uses to buy government bonds and other financial assets, in order to increase the money supply and the excess reserves of the banking system; this also raises the prices of the financial assets bought (which lowers their yield).

Bernanke’s decision to deploy $600 billion for a second round of quantitative easing has been portrayed as downright evil by many in the right. In November, Glenn Beck prophesied it could lead to the collapse of the U.S. economy!

Now I’m not interested in getting into whether quantitative easing is good or bad for the economy. I’m not sure. What I am sure of is most people don’t know what the hell they’re talking about, pro or con.

Consider this: Japan in the 1990s entered into a period where no matter what they did, their economy was dead in the water. You’ll never guess what Milton Friedman, darling of the right, recommended …. the same thing Bernanke did at the Fed: quantitative easing.

Here’s an excerpt from an interview Milton did in 2000:

David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero,  monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?

Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy.Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

At the very least, right wingers need to tone down some of the rhetoric surrounding Bernanke and the Fed. To do otherwise is just dishonest for the movement as a whole.