This article appeared in the Knoxville News-Sentinel September 1, 2013
The Kansas City Fed’s annual meeting in Jackson Hole, WY has evolved from inviting me and other pedestrian regulators and economists to being a who’s who concave of Ivy League economists and central bankers. Instead of presenting esoteric academic papers, the conference now features a few papers on a particular theme and then discussions by central bankers on how they are saving the world. This year’s conference was about the legacy of Ben Bernanke although he chose not to attend. As can be imagined that legacy is controversial outside the world of central bankers. It is called unconventional monetary policy. While conventional monetary policy features manipulation of the fed funds rate and monetary aggregates like the money supply and monetary base, unconventional monetary policy revolves around large scale asset purchases. The Bernanke Fed initiated this policy with the establishment of specialized lending facilities early in the recession and lending to nonbanks and foreign banks. Gradually, the Fed wound down the special lending facilities and then concentrated on asset purchases inflating its balance sheet to around $3 trillion by year end 2012. Currently, the Fed is purchasing around $40 billion in mortgage backed securities and $45 billion in Treasurys per month. At Jackson Hole, Christine Lagarde, the managing director of the International Monetary Fund, said that Bernanke and other central bankers had prevented a severe depression through unconventional monetary policy. She said that the policy was a clear success and the world’s central bankers should continue such policy. However Lagarde did not mention that such policy made the recovery from recession the weakest in history. The central bankers also did not dwell on the fact that such a policy has made it difficult to unwind. Indeed, the mere mention of the possibility by Bernanke sent the stock market into a tizzy. However, the fact remains that research indicates that the Fed’s policy has created market distortions, market volatility and asset bubbles that could lead to another serious downturn. In fact a paper at the Federal Reserve Bank of St. Louis concludes that the Fed’s term auction facility which was a program designed to lessen the spread between short term bank borrowing rates and equivalent Treasury rates (risk premium) actually increased the rates because it signaled to the market that the financial crisis was actually worse than the market had thought. At Jackson Hole a paper was presented by Northwestern University’s Arvind Krishnamurthy that the Fed’s purchases of mortgage backed securities had more of an economic impact than did the purchasing of Treasurys. Indeed Krishnamurthy finds that Fed purchases had little economic benefit. Perhaps not ironically, the purchasing of Treasurys did benefit the Administration in that it allowed increased deficit spending as the Fed financed the government’s deficit spending.
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