While I wasn’t surprised that the FOMC accelerated their taper, I wouldn’t have been surprised had they hit the pause button this time. The December jobs report plus other recent weaknesses in the data had provided sufficient cover to pause. That they did not do so suggests that they really wanted out, which is quite a contrast to their apparent attitude just a few months ago. They’ve gone from looking for an excuse to continue to looking for an excuse to taper.
It was time. I’m not one of those who thought all the QE was a mistake despite having to rely on counterfactuals to justify it. But, if it was helping the economy to grow faster and create jobs faster, then it surely had hit diminishing returns.
I’m glad we had two months of taper decisions under Chairman Bernanke’s watch. He can leave now with the assurance that he didn’t go a bridge too far. The new Chairman will find it more difficult to reverse course.
I sat next to Ben Bernanke at the FOMC table when he served his first term as Fed Governor. And, while pleasant and smart, he never struck me as a fine Chairman in the making. That shows how much I knew. Or, perhaps, as so often happens, the job made the man rather than the other way around. I retired in November 2004, but one can’t help wondering at each well-publicized FOMC meeting how one would have voted had he been there. That wasn’t hard. What was hard was, in late 2007 and throughout 2008, wondering what in the world I would do if I were chairman. I couldn’t imagine. They were in unchartered territory and the new Chairman more than rose to the occasion.
Watching events play out from the sidelines was interesting but frustrating. In the early stages of the financial crisis, I couldn’t believe how the main players stood by and watched mark to market accounting rules, which never should have been applied to banks, destroy so much bank capital unnecessarily and cause so many bank failures.
Also frustrating was all the talk about moral hazard when the world seemed to be falling apart. Apparently, we were supposed to let the world implode this time to reduce the effects of moral hazard next time. No one seemed to notice the irony when almost overnight—after Lehman failed—how the narrative changed from “let ‘em fail” to “letting Lehman fail was their worst mistake.”
As the Fed’s balance sheet grew through the excess reserves of the banking system came calls for the Fed to sell securities to “mop up” the excess reserves. After all they weren’t necessary today and they could feed inflation later. Thankfully, the Chairman had been enough of a student of the Great Depression to realize he was being asked to repeat the Fed’s great mistake in that regard then. On two separate occasions in the mid-1930s, the Fed raised reserve requirements to mop up those excess reserves. Of course they turned out not to be excess in the minds of the bankers who were being beaten about the head and shoulders.
Another interesting irony to watch unfold was the attitude toward quantitative easing expressed daily on financial TV. The guests on financial shows were overwhelmingly against it until it began to dawn on them that it was supporting the stock market so much. Then the worries went from being against QE on principle to dreading even a small taper in the pace of QE.
It was sad for me to see the Libertarian candidate for President draw almost the entire presidential field into being anti-Fed and anti-Bernanke. At least he based it on his reading of Austrian economics. I’m not sure about the rest of them—just their reading of the polls I reckon.
Anyway, I personally believe that Chairman Bernanke did a fine job, and I wish him well.