I'm starting to like Federal Reserve Chairman Ben Bernanke. I still wish the Fed didn't exist, but if we must have fiat money, its source should at least be entertaining. Bernanke's new conference last Wednesday was the best one yet.
As we now know, the Federal Open Market Committee stunned Wall Street with its decision not to taper the quantitative easing program. Prior to the announcement, analysts were so sure of the outcome they could only debate a few details. The point they missed was hiding deep within Fed-speak, but it is there.
Bernanke spent the last few years trying to make the Fed more "transparent." The quarterly media events were his idea. He looks and sounds awkward, but he makes every word count.
I think the Fed delayed its tapering decision because there is a significant risk of political chaos in the next few weeks. Parts of the government have to close on Oct. 1 if the two parties can't reach a budget compromise.
The budget fight is small potatoes as compared with the next one. The U.S. Treasury will reach its statutory debt ceiling in mid-October. These political games clearly annoy Bernanke, but he says it in very polite terms like "Fiscal policy is restraining economic growth."
Bernanke went into his news conference knowing someone would ask about the budget and debt limit fiascos. Answering Peter Barnes of Fox News, he said:
"Our ability to offset these shocks is very limited, particularly a debt limit shock. I think it's extraordinarily important that Congress and the administration work together to find a way to make sure that the government is funded, public services are provided, that the government pays its bills and that we avoid any kind of event like 2011, which had, at least for a time, a noticeable adverse effect on confidence on the economy."
Here is my translation: "Stop the games, Congress. You're playing with fire."
Bernanke chooses his words carefully. His use of terms like "shock" and "extraordinarily important" was no accident. His recollection of 2011's "adverse effect" was no accident. His admission that the Fed's power to offset the shocks is "very limited" was no accident.
Barnes specifically asked if the Fed would respond to a debt limit crisis with "additional accommodation." Bernanke responded, in so many words, "No."
With that answer, Bernanke inoculated himself and the Fed from history. If Congress and the White House precipitate a debt limit "shock," they will bear the blame. He warned them. Public polling data indicates the blame will go mostly to Republicans.
Bernanke warned Wall Street, too. Would he really let a "too big to fail" bank
collapse? I don't know, but he left a little doubt. Now we will see if it was enough.
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