As Bernanke Doubles Down On 'Greenspan Put,' Larry Summers Exhales

The world’s financial markets bounced back quickly after this announcement. But this retrenchment to “highly accommodative” or easy monetary policy is a turnaround from an earlier meeting in July, when Bernanke suggested it might be time to begin tapering the Fed’s purchases—an announcement that sent shockwaves through the market. While Bernanke’s latest announcement of continued easy monetary policy gave the markets a temporary boost, it leaves larger questions unanswered: What happens when the Fed does taper off its purchases? Even more importantly, how does the Fed unwind the current holdings on its balance sheet?The FOMC has 12 members made up of members of the Federal Reserve’s Board of Governors and a rotating group of Federal Reserve Bank presidents. The committee meets eight times a year to develop a consensus on the economic outlook in order to set interest rate policies. At the recent September meeting, the outlook was not rosy: the committee dialed back projections of economic growth and improvements in employment. While acknowledging some progress, the committee determined that that with the economic recovery still fragile, the time was not right to tighten monetary policy. As a result, Bernanke announced the Fed’s easy money policy would remain in place at least until the unemployment rate drops to 6.5 percent—substantially lower than the current 7.3 percentrate.In effect, Bernanke has doubled down on the “Greenspan put,” opting for an aggressive use of easy money to fuel economic growth.spherical roller bearing Former Fed Chairman Alan Greenspan became known for dropping the federal funds rate in response to any signs of a flagging economy.modern lamps The regularity with which Greenspan would intervene led investors to rely on the Greenspan put, shoring up weak markets and protecting investors. Unfortunately, these artificially low interest rates were a substantial contributor to the overheated economy and excessive risk-taking that ultimately led to the financial collapse of 2008. Cheap money fueled a bubble in the housing market as investors responded to false signals coming from the Fed’s monetary policy. This boom was inevitably followed by a bust, as the malinvestments generated by easy money came home to roost. 

The Bernanke Fed is continuing in this tradition, raising loose monetary policy to new heights with a new array of policy tools and instruments. Quantitative easing in its various iterations attempted to spur economic growth through monetary interventions that have kept interest rates at historic lows. And as Bernanke admits, quantitative easing has taken the Fed into uncharted waters with new challenges. Most alarming is the growth in the Fed’s balance sheet. From 2007 to July 2013, the Fed’s assets grew from $869 billion to nearly $3.7 trillion, and Bernanke announced this week that this expansion will continue unabated for now, with the Fed purchasing $40 billion worth of mortgage-backed securities and $45 billion in longer term Treasuries every month.News of the Fed’s accommodative polices is pushing markets sharply upward, which might seem like a good thing in the short run. But it is indicative of a problematic addiction to easy money that could have adverse impacts over the long run. Back at the July FOMC meeting, markets reeled after Bernanke’s mere suggestion that it might be time to start thinking about tapering Fed purchases. But the Fed cannot continue its massive monthly purchases indefinitely. Already, many economists have identified bubbles in emerging markets, the result of excess cash generated by the Fed’s easy monetary policy sloshing through the world’s markets. As in the past, easy money has put investors on a path that ultimately leads to more economic dislocations, because the underlying market fundamentals cannot sustain investments based on distorted interest rates.carbon cloth 

Ben Bernanke’s term as Fed chairman ends on January 31, 2014. His legacy will be the regime of quantitative easing, a powerful new tool that many claim restored markets after the disastrous collapse in 2008. He will most likely walk away confident that he staunched the bleeding. Yet a proper evaluation of his policies requires a longer-term view. The recession has been one of the longest and deepest in American history, and despite the massive injections under quantitative easing,Drawstring Backpack today’s economy remains sluggish,double sided tape with persistently high unemployment and weak economic growth five years after the financial collapse.Bernanke may walk out of office to the praise of Wall Street for a job well done, but his successor probably won’t be so lucky. At some point, not only must the Fed taper, but it also must determine an exit strategy for the $3.7 trillion in assets sitting on its balance sheet as a result of quantitative easing. The easy money this created may be sowing the seeds for the next economic downturn. The new Fed Chairman will face the unique challenge of cleaning up after quantitative easing. It looks like pulling his name from the list of potential Fed chairmen might turn out to be Larry Summers’ best career move.