Federal Reserve Chairman Ben Bernanke appeared on "60 Minutes" last night to set the critics straight. Apparently, those who have questioned the wisdom of the Fed Chairman's $600 billion bond buying plan (aka "Quantitative Easing") haven't considered "the risk of not acting."
In defense of the critics, it's not that they haven't considered the risks of not acting, rather the fear has been that the plan won't accomplish the Fed's main goals of keeping longer-term interest rates low, which the central bankers hope will:
- Encourage banks to lend the more than $1 trillion they hold in excess reserves
- Prod consumers to borrow and spend more freely
- Provide companies with the confidence to hire more
Bernanke on 60 Minutes: The Top 3
- The Fed will expand and increase the $600B: When Bernanke says that "it's certainly possible" that the Fed spend more than $600 billion on bonds, I assume that means that it's likely to be a cool trillion when all is said and done.
- Jobs will be scarce for a while: BB said that the unemployment rate will probably only decrease by one percentage point a year, which means it will 4 to 5 years (2015!!) before the economy returns to a "normal" unemployment rate of 5-6 percent
- Deficit reduction or tax reduction? YES: In a nod to the current battle on extending the Bush-era tax cuts and the deficit commission's plan, Bernanke acknowledged that we need both a short term and a long term strategy. In the short term, we would would minimize any "actions this year that will affect this year's spending and this year's taxes in a way that will hurt the recovery," but over the long term, we need to think about and create a plan to address "the long term structural budget deficit." Without saying exactly what he meant, Bernanke noted that 10-20 years from now "almost the entire federal budget will be spent on Medicare, Medicaid, Social Security, and interest on the debt. There won't be any money left for the military or for any other services the government provides. We can only address those issues if we think about them now." Hear that, Congress?