November 4, 2012
Regardless of who wins the presidency it is rumored that when his term as Fed chairman expires in 2014, Ben Bernanke will not be reappointed. This is no surprise if Romney wins. However, it is somewhat of a surprise if Obama is re-elected. This is because Bernanke has been the most accommodating Fed chairman in history. Under Bernanke, the Fed has purchased billions in Treasurys allowing the administration to spend without a budget constraint. One would think that Obama would welcome the continuation of what has been - to him - a wonderful relationship. On the other hand, Romney would certainly be delighted if Bernanke decided to exit even earlier, say January 2013. However, regardless of what Bernanke decides, a President Romney would be left with a Federal Reserve Board comprised of governors all appointed by President Obama. Even though the chairman gets the majority of the publicity, all the governors sit on the Open Market Committee that makes the decisions regarding monetary policy. This Board of Governors has been unanimous in its support of Bernanke in keeping long term interest rates artificially low. Thus, a Romney appointed chairman may encounter a recalcitrant group of fellow governors and find it difficult to reach a consensus if a change in policy were desired. Nonetheless, Fed policy even under Bernanke has been a contradiction. Through the expansion of its balance sheet by purchasing Treasurys in QE1 and QE2 and the purchase of mortgage backed securities in QE3, the Fed has dramatically increased the amount of excess reserves held in the banking system. Normally, these reserves would be loaned out, creating money. The result would be highly inflationary. That the banks are not lending the reserves and not creating money are a product of two disparate forces. The first is the Fed is paying 0.25 percent interest on the excess reserves. That amount is about what a two year Treasury earns, so the banks can hold the reserves and earn interest without incurring any default risk. Bernanke has indicated that this is how the Fed can ward off inflation. By manipulating the interest it pays on reserves it can induce the banks not to lend. However, by paying interest on reserves, the Fed is acting counter to its own stated policy - that of stimulating economic growth. Indeed, if you take out the increase in the government sector, overall economic growth during the Obama years has been negative. Coupled with the Fed seemingly driving the economy with its foot on both the accelerator and the brake are the actions of the Fed, the FDIC and the Comptroller of the Currency as bank regulators. All are still smarting over being accused of lax regulatory oversight precipitating the financial crisis. As a result all are now being heavy handed resulting in a tightening of loan standards drying up funding to businesses and individuals. So while the Fed is saying that it is pursuing expansionary monetary policy through its purchases of long term securities it is also not allowing the economy to expand. It would be a welcomed change to see a coherent Federal Reserve policy. Therefore, it will be a welcomed sight to see Bernanke leave.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com