Monday, December 23, 2013

Listening to Bernanke during Christmas

Soon, the Chairman of the Federal Reserve, Ben Bernanke, will be stepping down after 8 dramatic years at the helm. Since I like to work with some form of aural stimulation, I decided, after having exhausted all available episodes of Covert Affairs and James Bond flicks,  to listen to some of Bernanke's testimonies to the US Congress. Not as dramatic as Bond but as riveting. I picked a testimony from Feb. 2007 as my first hearing as I did not want it to be tainted with the stench of the financial crisis. I wanted to see how things were before we were exposed to terms like "quantitative easing," "taper," etc.  It is difficult to follow 2 or 3 hours of the testimony, especially when you are trying to multitask. Still, I was not disappointed. I would have posted links to newspaper articles discussing this hearing but I could not find appropriate ones so far. I'm sure I'll find appropriate ones soon and post links to them too.

Barney Frank and Spencer Bachus started off the hearing by viewing the economy through their respective tinted glasses, with Bachus' being distinctly rosier. Ron Paul went directly for the jugular - he harangued about Congress not having the authority to create the Federal Reserve in 1913 and that any subsequent actions of the Fed were illegal too. It was also peppered with words like "fiat," "fiat,"....., and "fiat." Later, Paul questioned Bernanke on the current account deficit and currency manipulation by China and Japan.  In response, Bernanke talked about how the current account deficit is a result of the imbalance between the rate of savings and investments in the US and abroad. Savings rate is usually high in China and the oil producing nations, whereas it is comparatively low in the US.There was interesting back and forth with Bachus in which Bernanke said, with regards to Fannie Mae and Freddie Mac, that the portfolio of the GSEs attained enormous size with complex derivatives necessary to maintain those portfolios. He was also worried that they posed a systemic risk to the economy. Little might he have known that the Fed portfolio would also attain a gargantuan size, though the two may not be the same.

Many of the people who questioned Bernanke later expressed great surprise at the apparent ease with which they could understand the Chairman. Mel Watts (NC) said "I happen to like your predecessor but I didn't understand a damn word he said." Shays (Connecticut) said: "I thought the responsibility of the Chairperson is to speak in tongues!"

Barney Frank had a zinger on the dual mandate of the Federal Reserve: "I appreciate the fact that you have two children and that you love them both. But I'm afraid that one might get more for Hanukkah than the other!" Wonder if Jeb Hensarling will have any during the hearings reviewing the "many mandates of the Fed" on the centennial anniversary of the Federal Reserve.

One important take away I had from the hearing was the focus on inequality and wage gap. Basically, the focus on 1% and 99% was not born with the Occupy Movement. The discussion on the topic is may in fact have been better before the financial crisis, though I am not sure how much the Federal Reserve or monetary policy can really do to alleviate this particular problem. Congresswoman Maxine Waters seemed to show genuine respect for Bernanke for a speech he had given on income inequality and the wage gap (I think this is the speech she was referring to). I wonder whether the respect I observed continues to this day.

For those interested in further details of the hearing, here is the link:
The State of the Economy, the State of the Labor Market, and the Conduct of Monetary Policy Feb. 15, 2007.

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