Yesterday, I highlighted some of the more mainstream comments of Ben Bernanke. In general, he comes across as a more or less right leaning economist. This is the same school that taught Alan Greenspan. Bernanke has made some other interesting policy observations and or arguments. Several of these have raised concerns from some economi
sts.
But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Before you get really concerned about the above statement, it is very important to place it in context. The statement comes from a 2002 speech titled Deflation: Making Sure “It” Doesn’t Happen Here. He argued the Fed should use this policy only after it has lowered real interest rates to 0% and that policy has failed to reignite price appreciation. Most people believe that after the Fed has lowered rates to 0%, it has no other policy options. Bernanke is essentially arguing in times of crisis the fed has other policy options available when traditional options fail. Should the US ever experience a deflationary spiral (which is an economic crisis), it is possible political leaders may call for this type of radical policy.
There are some people who argue the above quote also demonstrate Bernanke will follow in Greenspan’s footsteps of allowing asset inflation based on cheap money. This is essentially what is currently happening in the US economy with housing, and what happened during the 1980s and 1990s with the stock market. This is an entirely valid argument and should be seriously considered.
Finally, Bernanke is the person who put forward the idea of a global savings glut to explain low US Treasury rates and the record US trade deficit. He outlined his theory in a speech earlier this year. I will summarize his basic points. For more detail, please read his speech.
First, an economy must have some amount of savings to expand. Financial intermediaries – banks, investment firms, etc…. – pool these savings and lend them to business. Business then invests the savings in productive capital to grow its respective business, which in turn grows the economy.
Bernanke argues there are countries with excess savings and countries with insufficient savings. Most Asian countries are an example of the former and the US is representative of the latter. He continues that for the last 10 or so years, countries with excess savings have been lending their excess savings to the US because the overall returns and risks are better in the US relative to other investment opportunities.
This theories most interesting point is also its most dangerous. Central to this argument is the idea forces outside the US are dictating the terms of the US trade imbalance. As such, there is little the US can do to change the situation. He makes the following comment at the beginning of his speech:
However, I believe–and I suspect that most economists would agree–that specific trade-related factors cannot explain either the magnitude of the U.S. current account imbalance or its recent sharp rise. Rather, the U.S. trade balance is the tail of the dog; for the most part, it has been passively determined by foreign and domestic incomes, asset prices, interest rates, and exchange rates, which are themselves in turn the products of more fundamental driving forces.
It is far too easy to use the above quote as justification for doing little if anything domestically and instead bullying other nations to change their internal policies. As an example, for the last year, US officials have aggressively told Europe and China to change their domestic economies; to essentially develop more consumption oriented domestic policies. The theory is this would create a larger market for US products, thusly enabling the US to export more goods to those countries and close the trade gap over time.
At the same time, the US consumer’s debt level is at historical highs. For the last 5 years, wages after inflation are near stagnant. As a result, the 2/3 of the US economy represented by consumer spending has grown largely through debt financing. There is no mention of this US economic development in any discussion of Treasury Secretary Snow or any other member of the Bush economic team.
I don’t doubt Bernanke’s motives in putting forth this theory. From what I have read, he appears to be a standard, right-leaning economist. In addition, there may be some validity to his arguments about the international causes of the US trade imbalance.
However, this theory can too easily instill a sense of passivity in US policymakers. At a time when there should be a serious discussion about the lack of US savings, this theory leads far too easily to throwing up ones hands and saying “it’s all globalizations fault. It will balance itself out in the end” and leaving it at that. Enough editorializing.
In conclusion, Bernanke appears to be more or less a standard right-leaning economist right out of the Greenspan mold. He believes in inflation targeting and the idea the Fed should be a neutral player in the political arena. He has advanced some theories that have caused a heated debate (especially the global savings glut theory) in economic circles. However, none of these ideas are so completely radical to make him a member of the extreme wing of conservatism. I believe Bernanke will in general continue more or less in Greenspan’s economic shoes for the foreseeable future.