Bernanke II: Did he get the job, and how is he doing?
A few weeks ago I asked for your opinion: would you hire Ben Bernanke based on his credentials? I received a number of responses and it was actually split 50-50 on those who would and wouldn’t hire him. Some of you agreed with the decisions he has made while others strongly disagreed. To get a better sense of Mr. Bernanke’s impact since he’s been in office, I’d like to review his responsibilities, then look at some of the decisions he made through the last couple years and why those decisions were made.
What is his role?
As Chairman of the Federal Reserve, Mr. Bernanke’s job is to help reach set objectives for the continued growth and stability of the economy. To reach these goals he is responsible for helping to direct the Federal Reserve’s monetary policy. This includes, controlling:
a. The supply of money
b. The availability of money, and
c. The cost of money or rate of interest
Each of these go hand in hand and can have an effect on each other. Currently the monetary policy under Mr. Bernanke is what is called an Expansionary Policy. This means he is increasing the total supply of money in the economy, a policy traditionally used to combat unemployment in a recession by lowering interest rates. To do this, he has used these strategies:
Decrease Interest Rates
During his tenure, Mr. Bernanke has reduced the Federal Fund Rate, which dictates the interest rates banks charge for loans, from a high of 5.25% down to the current level of 0.25%. The logic behind this is that this will entice companies into taking loans to help grow their business. Some companies might be apprehensive in spending money in a down economy, but a lower interest rate might spark them to take action. New jobs are created and products are purchased, which puts more money into the system. People are also more likely to take loans when interest rates are low. This could be for the purchase of a new home, car, TV, etc. All this additional spending helps boost the economy.
Increase the Money Supply
The Federal Reserve has continued to print money with Mr. Bernanke at the helm. This is another way of lowering interest rates, because more money is available to lenders and borrowers alike. The hope is that the new money will trickle down to employees and others, who then spend the money putting it back in the system thereby stimulating the economy.
Support the Stimulus Package & Financial Firms
As a result of his studies of the Great Depression, Mr. Bernanke is under the belief that the Federal Reserve needs to pump additional money into the economy to help prevent another Depression. Because of this, he has supported the actions taken by President Obama in regards to the Stimulus Package such as passing new legislation on tax cuts, rebates and increased government spending. All measure he believes will help improve the economy.
In addition to Mr. Bernanke’s support of the Stimulus Package he believed additional measures needed to be taken. “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system.” Mr. Bernanke went on to say, “History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively.” These quotes were from a speech he made in January of this year backing the decisions to help bail out Wall Street. If financial institutions were allowed to fail, an even greater credit crunch would result leading to additional bank failures and unemployment of a massive scale. This theory relates back to his Financial Acceleratory Theory, which was mentioned in my last article.
So now that you have a better understanding of his role in overseeing our Country’s monetary policy and why he made the decisions he has, do you feel any differently than you did previously on hiring him or not? What are you opinions on his theories and do you think the decisions he has made will help or hurt our economy over time?
Jeff Studebaker, Investment Advisor
July 29th, 2009 at 5:48 pm
I did not respond the first time you asked the question about Bernanke. However, from the beginning I have agreed with most of his decisions. He had to make hard choices during a very tough period in our economic history and I think he is on the right track. I also have confidence in his decisions going forward. I cannot say the same for our President or our politicians. They seem more intent in staying or gaining power than making decisions that will help us out of this mess.
July 29th, 2009 at 6:24 pm
I just read the 7/29/09 Smart401k Blog which tried to define Bernanke’s job and solutions.
This response appeared to be an advertisement for the Obama policies even though it did list the approach Ben took to the problems. There are normally two sides to a story and this article, I felt, only presented one side…..the Bernanke / Obama side. You could do better.
August 9th, 2009 at 7:51 pm
I believe Bernanke has done an admirable job during a time of high economic risk and unprecidented uncertainty. While the bailouts were unpopular, I believe they had to be done and hopefully when those dollars return to the Fed the economy is strong enough that they can be taken out of the money supply.
I also certainly hope Bernanke continues to press for government fiscal responsibility by advocating minimizing deficit spending by the Obama administration and Congress.