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“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only,” wrote Charles Dickens in Tale of Two Cities.
Now, Federal Reserve Chairman Benjamin Bernanke has addressed the autumn of our discontent – and unleashed the spring of Federal Reserve credit to refresh the economy. Indeed,, Fed Chief Ben Bernanke has placed his bet on his version of economic light – a third round of Quantitative Easing. Apparently, QE3 is expected to do what QE1 and QE2 did not do. As the Washington Post reported: “The Fed’s steps were in many ways remarkable: For the first time, it made a definitive promise that it would keep interest rates ultra-low even if the economy starts to recover. That sent a clear signal that for years it will be cheap for consumers to borrow to buy homes and cars or for businesses to get loans to expand.
To reinforce the point, the Fed said it will buy $40 billion per month in mortgage bonds in addition to $45 billion in Treasury bonds through the end of the year, a process known as “quantitative easing.” After that, the Fed will reassess its actions, but it is likely to continue buying tens of billions of dollars of mortgage bonds unless the economy suddenly shows signs of a major rebound.
Critics have noted that the Fed’s action is a tacit omission that the American economy is still weak. Of course, many observers have prophesied what Chairman Bernanke would do. It didn’t take a PhD in economics. The New York Times’ Jeff Sommer wrote of such predictions at the beginning of August. After an interview with James W. Paulsen, chief investment strategist at Wells Capital Management, Sommers wrote: “Despite the signs of weakness, Mr. Paulsen is focusing on indications that the United States economy may have ‘bottomed.’ He said the biggest remaining problem might be psychological — that people’s ‘animal spirits’ have been depressed by the negative comments of American political and economic leaders.”
Further Fed action now — with both short- and long-term government interest rates extraordinarily low — would signal that the economy is ill, not healthy. The Fed ought to consider raising rates, not lowering them, he said.
“We need a sign of confidence in the strength of the economy,” he said. “And we need to let the economy continue to self-medicate, to heal itself, and that process is already well under way.”
Mr. [Eric] Stein, for his part, says that if there is no big improvement soon — and he doesn’t expect one — it’s likely that Ben S. Bernanke, the Fed chairman, will embark on more large-scale asset purchases, or quantitative easing, later this election year, possibly in September. “I think Ben Bernanke just needs to see more data,” Mr. Stein said. “I think if the data comes in and it continues to be weak, the Fed will have to act.’
Well, the data is in, and the Fed has acted – apparently with knowledge that is not really propriety: these are not the best of times. Perhaps some central bankers claim say with Sydney Carton at the end of Dickens’ book: “It is a far, far better thing that I do, than I have ever done; it is a far, far better rest that I go to than I have ever known.”
Those central bankers would be wrong. Perhaps some central bankers might sacrifice fiat money for a far better thing – the gold standard. It is, after all, time to go the other way from that direction chosen Bernanke in the United States and Mario Draghi in the European Monetary Union.
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