Federal Reserve Chairman Ben Bernanke is failing, argues Christopher Mahoney, a former vice chairman of Moody's.
The problem is not that the Fed's quantitative easing (QE) is addicting the economy to a stimulus that will lead to inflation. The problem is that the Fed has failed to increase the money supply, Mahoney writes in an article for Project Syndicate.
Mahoney tells those urging the Fed end QE and return the economy to "a more normal state" to look at the data. Money growth since the financial crash has averaged in the mid-single digits, less than in previous recoveries, despite the Fed's "futile machinations" with multiple rounds of QE.
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"Since 2008, the economy has not been on stimulants, it has been starved for oxygen," Mahoney asserts.
"The economy hasn't been on cocaine; it's been on aspirin. There is no dangerous drug for the economy to get off of."
Purchasing massive amounts of bonds from banks has not impacted the money supply (M1) because the money remains on deposit at the Fed, according to Mahoney. "The Fed may as well have been buying art for its offices for all the good that $2 trillion in bond purchases has done," he writes.
It's like the Fed has its foot on the accelerator, but the car is not moving because the transmission is broken.
Bernanke's Fed has failed to meet its mandate to provide full unemployment, Mahoney charges. Unemployment remains high and nominal growth remains low — 3 to 4 percent, a rate once considered recessionary.
No one can blame hawks at the Fed from blocking Bernanke, Mahoney says.
"He's been chairman for eight years; it's his Fed; it's his policy; and it's his economy. He has failed as Fed chairman if he leaves office with his mandates unfulfilled and twelve million people out of work."
To get the economic vehicle rolling, we need at least 6 percent nominal growth (4 percent real growth), he suggests. More of the same won't work.
Mahoney recommends that the Fed stop buying bonds from banks and monetize the entire deficit by buying bonds directly from the Treasury and buy non-bank assets such as exchange-traded funds, precious metals, foreign government bonds and private-label residential- and asset-backed securities. The Fed should also stop paying banks interest on reserves and, if necessary, "charge a custodial fee for holding reserves."
New York Times columnist Paul Krugman has also faulted the Fed for failing to bring down inflation. Instead of battling high unemployment, Fed officials have talked about ending QE.
Policymakers, he writes, seem "gripped by a combination of complacency and fatalism, a sense that nothing need be done and nothing can be done. Call it the big shrug."
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