In a remarkable speech, delivered, today, by Federal Reserve Chairman Ben Bernanke, via satellite to a financial markets conference sponsored by the Federal Reserve Bank of Atlanta in Sea Island, Ga., Bernanke said that turmoil in financial markets has eased somewhat, but the situation is still “far from normal”.
Most remarkable, Bernanke used the opportunity to justify his inflationist money printing ways. He took his money printing justification to an intellectual level, quoting freely from the 1873 work of Walter Bagehot, Lombard Street. The same Bagehot who once remarked, “The people are most credulous when they are most happy.”
But, what was not said, could very arguably be considered most important. In a speech justifying central bank intervention by adding liquidity, i.e., money printing, Bernanke did not once mention the threat of inflation. Not a hint of concern. In passing, he did mention the problems of moral hazard, but no mention of potential inflationary consequences of central banks supplying liquidity.
When you have a central banker give such a significant speech and not mention concern about inflation, you know that the wrong man is at the helm.
Bernanke is an arrogant academic who believes in money printing as the solution and it will be well down the road before he admits an inflation problem, if he ever does.
From his speech, justifying his inflationist ways:
The notion that a central bank should provide liquidity to the banking system in a crisis has a long intellectual lineage. Walter Bagehot’s Lombard Street, published in 1873, remains one of the classic treatments of the role of the central bank in the management of financial crises…
Bagehot’s advice on how the Bank of England should respond to a generalized liquidity shortage was somewhat counterintuitive. He wrote:
“In opposition to what might be at first sight supposed, the best [policy] . . . to deal with a drain arising from internal discredit, is to lend freely. The first instinct of everyone is the contrary.”
Bernanke explains that the money printing is working:
To date, our liquidity measures appear to have contributed to some improvement in financing markets…conditions in the Treasury repo market, which became very strained around mid-March, have improved substantially. Liquidity is better in several other markets as well. For example, spreads on agency mortgage-backed securities have dropped in recent weeks after reaching very high levels in mid-March, as have spreads between conforming fixed-rate mortgage rates and Treasury rates. Spreads on jumbo mortgage loans have retraced a portion of their earlier large increases, but recent regulatory and legislative changes make it difficult to assess the impact of liquidity measures in that segment of the market. Corporate debt spreads have also declined somewhat from recent highs.
These are welcome signs, of course, but at this stage conditions in financial markets are still far from normal. A number of securitization markets remain moribund, risk spreads–although off their recent peaks–generally remain quite elevated, and pressures in short-term funding markets persist. Spreads of term dollar Libor over comparable-maturity overnight index swap rates have receded some from their recent peaks but remain abnormally high.4 Funding pressures have also been evident in the strong participation at recent TAF auctions even after the recent expansions in auction sizes, and, of late, depository institutions have borrowed significant amounts under the primary credit program for terms of up to 90 days.
Bernanke suggests that someday he may stop printing money (But not today):
Once financial conditions become more normal, the extraordinary provision of liquidity by the Federal Reserve will no longer be needed. As Bagehot would surely advise, under normal conditions financial institutions should look to private counterparties and not central banks as a source of ongoing funding.
