QE3 is no substitute for leadership vacuum

Federal Reserve Chairman Ben Bernanke Federal Reserve Chairman Ben Bernanke

Federal Reserve Chairman Ben Bernanke’s testimony to the Senate Banking Committee on July 17 should have scared the hell out of us, but apparently it didn’t because the major stock market indexes shrugged off the negativity. The Dow advanced from a close on July 16 of 12,690 to 13,096 at the close on Aug. 3 (the date this article was written) — a solid 400 point gain that fully ignored the fact that the Fed is relatively impotent at this point.

Bernanke’s plea to Congress was to take action to reduce uncertainty. Chuck Schumer’s response to that plea suggests that Congress will not heed Bernanke’s advice:

“Given the political realities of this year’s election, I believe the Fed is the only game in town," Sen. Charles Schumer, D-N.Y., said. "I would urge you, now more than ever, to take whatever actions are warranted."

"So get to work, Mr. Chairman."

We are at a point in time where we cannot just assume a business as usual stance. We are in a very serious crisis that could deteriorate rapidly into a worldwide collapse. The Fed’s monetary policy isn’t working and if it is the only “game in town” as Schumer states, then we are in big trouble.

There is an amazing divide amongst the nation’s leading economists on the state of the economy at the present time. No one seems to think we are recovering from the 2008-09 recession at an acceptable rate, but the majority of economists continue to say that the benign growth we are experiencing still is on the right trajectory and that we “will muddle through.” One has to wonder if these muddle through economists are looking at the macro picture through rose colored glasses.

Bernanke is doing a remarkable job of walking a tightrope. On the one hand, the slightest innuendo that Fed policy is not working and he could start a sustained stock market slide that would move rapidly to a worldwide selling frenzy. That would be irresponsible on his part. On the other hand, to mislead us with an “all’s well” statement would be outright deception. He’s taking the middle road and our hats should be off to him for the job he is doing.

That said, it behooves us to take a really close look at what has occurred in the post-recession period to see if we can delve a little deeper into what Bernanke’s real thoughts are. We need to start with a little refresher course on Keynesian economic theory — the lifeblood of monetary policy.

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