Ben Bernanke’s Heavy Artillery: Will Open-Ended Bond Buying Drive Down Unemployment?

Ben Bernanke and made an open-ended commitment yesterday to purchase mortgage-backed securities at a rate of $40 billion per month, aiming to inflate asset prices and pump fresh credit into the economy. The move answers critics who have accused him of being too timid, but what will it do to bring down unemployment?

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Jonathan Ernst / Reuters

Federal Reserve Chairman Ben Bernanke addresses U.S. monetary policy with reporters at the Federal Reserve in Washington, Sept. 13, 2012.

America has been mired in its worst unemployment crisis since the Depression, and everything policymakers in Washington have tried to fix the problem has — at best — been not good enough. Huge stimulus programs from Congress and low interest rates paired with massive asset purchases on the part of the Federal Reserve have by most accounts improved the unemployment situation. But four years after the financial crisis, the unemployment rate remains above 8%, and would be even higher if not for the hundreds of thousands of workers who have abandoned the workforce entirely.

And while Congress and the President have been locked in an ideological struggle over the role of government in the economy, unable to come to terms on any solutions to the crisis of joblessness, America’s central bank has been in a position to act unilaterally — above the political fray that is paralyzing Washington’s legislative process. That’s why many critics of the bank and its chairman, Ben Bernanke, have been calling vociferously for it to take more action to goose the economy and bring down unemployment.

(MORE: Will the Stock Market Keep on Rising?)

But it’s not like the Federal Reserve has been sitting on its hands for the past four years. In fact, this is arguably the most activist central bank regime the country has ever seen. It has kept short-term interest rates at basically zero since 2008. It has purchased trillions of dollars in U.S. government debt and mortgage-backed securities in an effort to reduce interest rates further and stimulate the housing market, the collapse of which precipitated the financial crisis. And it has even made announcements regarding its expectations of interest rates in the future, more or less promising that short-term rates would stay near zero for years to come.

Critics of recent Fed policy cite this as reason why it shouldn’t do more. They say that each successive round of asset purchases has yielded diminishing returns, while ratcheting up the ever-present danger of inflation. These detractors have decades of economic data that indicate that increasing the money supply will always, eventually, lead to inflation, and though we haven’t experienced any yet, that only means it will hit with a vengeance when it finally rears its ugly head.

Yesterday, Ben Bernanke and the Federal Open Market Committee came down on the side of those calling for more action, announcing a bold, open-ended mortgage-backed-security purchasing program, which will pump $40 billion a month into the economy indefinitely until the unemployment market improves significantly. Said Bernanke in yesterday’s press conference:

“If we do not see substantial improvement in the outlook for the labor market, we will continue the MBS purchase program, undertake additional asset purchases, and employ our policy tools as appropriate until we do. We will be looking for the sort of broad-based growth in jobs and economic activity that generally signal sustained improvement in labor market conditions and declining unemployment.”

So what makes this program different than the previous asset purchases, which have seemingly decreased in efficacy each time around? It’s the open-ended nature of the program that supporters believe will make all the difference. The Federal Reserve derives its power from its ability to set interest rates, but that tool has been stretched to its limits in recent years. Beyond that, the Fed can affect expectations about where short- and long-term rates will be in the future. Open-ended purchases of mortgages will have the effect of lowering interest rates, helping more people qualify for mortgages or refinance. But more importantly it will — in theory — have the effect of creating an expectation of generally higher asset prices in the future, which will motivate people to get off their duffs and spend money now. If companies and individuals are indeed convinced that prices will rise in the future, that would encourage them to spend, hire, and jump-start the economy out of its chronic underperformance.

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But not everyone’s convinced that the plan will work. More purchases of financial assets, critics say, will raise the price of financial assets, but those higher prices won’t translate into a more robust economy or greater employment. As David Dayen of Firedoglake argues, there’s only so much the lifting of asset prices can do without appropriate fiscal policy to accompany it:

“[Y]ou have to question the role of monetary actions by themselves to generate an economic boost, especially at this time. Lower mortgage rates may or may not prove helpful . . .  without fiscal stimulus and a reversal of the current trajectory of deficit reduction, we will never get to the desired trend for growth.”

Others, meanwhile, are afraid that the Fed’s new policy will spur inflation. Lord Abbott fixed income strategist Zane Brown was thusly critical of the Fed’s actions: “I imagine the Fed is likely to come under considerable criticism for assuming that monetary policy can be effective in creating employment,” he told CNBC.com.  “When you consider they are going to have this highly accommodative stance, even after the economic recovery strengthens, almost by definition it will generate inflation”

It’s difficult for me to see how, in this current economic environment, we could have sustained inflation at the same time as high unemployment. A huge part of product costs are labor, and median wages have actually been on the decline. It’s highly unlikely that we’d experience inflation without a commensurate rise in wages. And it’s difficult to see a significant rise in wages without unemployment first coming down, which is the whole point of this Fed action in the first place.

It’s clear from the numbers that unemployment is a far bigger problem than inflation for the time being, and in that context — and given the Federal Reserve’s mandate to promote full employment — taking actions aimed at reducing unemployment makes sense. The only question now is whether it will work.

(MORE: The Strange Allure of the Gold Standard)

27 comments
geoffrobinson
geoffrobinson

So I think the argument from the Fed is if they make housing prices higher people will feel richer and spend more money.

In other words, re-inflate the housing bubble and recreate the consumption issues we had during that bubble.

freshVeggies
freshVeggies

Christopher you need to change your name man.  There is a mentally challenged man going by almost the same name you have spouting all sorts of leg tingling comments.  If the Fed is going to digitize more money they should just send all households a check for $5 million.  That would do more for unemployment than giving the money to a bunch of bankers.

KentCrawford
KentCrawford

QE 3 will be a failure for two reasons.

First, business must look at the whole context of government policy.  They see a future of higher taxes and more regulations, capped with ObamaCare and its 21 new taxes and burdensome penalties and regulations.  In other words, there is no incentive to expand or to hire, but rather the reverse.  The Fed cannot address the host of incredibly bad policies emanating from DC.  this is the 'human factor' that negates economic models.  Only a major change in the direction of government policy will have a positive effect.

Second, QE 3 is likely to unleash inflation.  This will be less obvious -- except at the gas pump and super market -- as the reduced demand on the part of the consumer has served to keep inflation more or less in check, currently at about 4.5%.  However, if the economy starts to pick up and unemployment decreases significantly -- which will not happen under the current administration of idiots -- demand and inflation will both increase.  Further, QE 3 will hurt seniors disproportionately.  Their Soc Sec and pension monies will not go as far and their standard of living reduced proportionately.  Again, that 'human factor' that economic computer models cannot predict.

In summary, QE 3 should not save Obama bin Lenin, will not result in a material decrease in real unemployment [as opposed to government statistics which are indescribably inaccurate], and does pose real dangers to the economy.  As policy, it is a terrible and probably foolish gamble, but it is the only arrow in the Fed's quiver, thanks to the complete policy failures of the Obama administration.

manapp99
manapp99

Ironically Bernake embraces trickle down economics with his attempts to push up equities. Simultaneously the price of oil spikes and Egan Jones downgrades our credit rating. I am not sure who Ben thinks he is helping but with a future President Romney stating that he would not reappoint Bed as fed head it looks like he is making a late hour push to get Obama reelected and save at least three jobs. His, Obama's and crazy Uncle Joe Biden's.  

Raymond Chuang
Raymond Chuang

What WILL drive down unemployment is to finally tackle something that's WAY overdue: our overly-complex and economy-inhibiting income tax code.

We need something as radical as the no-loophole 17 to 18.5 percent flat tax that Steve Forbes proposed in 1996. Such an extreme tax simplification--especially the provision that bank account interest, capital gains and stock dividend payments no longer count towards Adjust Gross Income (AGI)--would result in a GIGANTIC land rush of liquidity into the USA (e.g., our banks are fully funded and our stock market will be way stronger) and it would encourage businesses to keep as much of their operations in the USA as possible, which means a WAY lower unemployment rate.

SAP Training
SAP Training

With Obama and the Congress failing, all eyes turn to Bernanke. His intentions, although well-meant is not going to have any perceptible change overall.  But I'm certain it's going to be glaringly obvious in the reserve's balance sheet.  What he thought of is to depress long-term interest rates artificially which in turn, is going to distort asset prices. And what good would that do?  What I want to ask is, if you're already in a hole, why the heck do you feel the need to keep on digging??

josephmateus
josephmateus

Mr. Christopher Mateus (Matthews) with all due respect you are totally mistaken here. Yes, inflation can as does occur even with high unemployment. Have you been at the gas pumps or at your supermarket lately? You will find that prices are considerably higher than they were one year ago. It goes like this nice and raw without all the dressing: Helicopter Ben Bernanke creates 40 billion of new fiat dollars out of thin air every month. This new free money goes to Wall Street, where investors use it to buy more and more shares not only of corporations but also of commodities, such as oil, coal, copper, silver, soy beans, coffee, beef, wheat, etc.

With this unabated  purchases, shares of companies and commodities go straight up, which in turn drives up the price of oil and pretty much all consumer goods, including food. As consumers end up having to pay more and more for commodities, the value of every dollar drops, because now you need more dollars to buy the same amount of stuff.

Now as all commodities are all prices in US dollars, as the dollar drops in value the price of oil and other commodities goes up, therefore it is a vicious cycle feeding in itself. Therefore unemployment has nothing at all to do with this. You could have even higher unemployment and still suffer from high inflation, meaning that the rich at Wall Street amp; company get richer, while the average citizen gets poorer. 

Now if all this new fiat dollars ended up in the hands of the people, there would be too many dollars chasing the same limited amount of goods, which would create even higher inflation. There is just no way you can keep on printing billions of brand new dollars everyday out of nothing without eventually having to pay the price. If anybody tells you differently, they are not being truthful with you.

bkuykendall
bkuykendall

 "It’s difficult for me to see how, in this current economic environment,

we could have sustained inflation at the same time as high unemployment."

Maybe because most of the things we buy aren't made here anymore, and therefore are not affected by our unemployment - but are affected by transportation costs and rising demand from the rest of the world?

danlhul
danlhul

"It’s difficult for me to see how, in this current economic environment,

we could have sustained inflation at the same time as high unemployment. "

Umm... have you NEVER read ANY history? In the early 20s the Germany had high unemployment and inflation on a scale usually associated with 3rd-rate kleptocracies in Africa. By the end of that disastrous period, a beer cost 4 million marks. Even Keynes, that idol of stimulus-worshipping progressives, admitted that printing money was the source of the problem.Give it about three years and I expect that you'll be using hundred-dollar bills to buy a coke from a vending machine.

Mary Waterton
Mary Waterton

I don't see how the Fed buying Mortgage Backed Securities is going to create jobs. To me it's an indicator that the too-big-to-fail banks are in trouble again.

elioflight
elioflight

Only those with ALL the money can jump-start the economy. The middle class cannot do it unless they have better wages and jobs--you know EXTRA money after bills.

The job-creators have fallen down on the job--they took their record profits, earned from tax breaks and deregulation, and stashed them out of the country. Wealthy families around the world have stashed $32 TRILLION in off-shore accounts--that's a lot of money OUT of the world economy. (Reuters, July 22, 2012)

Until those wealthy business people are taxed at a fair rate (the same rate as the rest of us) but given the chance for write-offs for job creation and infrastructure improvements, they will continue to take the money and run and the US economy will continue to stumble.

John David Deatherage
John David Deatherage

People are not buying houses because interest rates are too high.  People lack confidence in the government and the economy.  Desperate hail mary plays by the Fed further undermine confidence.  The economy will recover on its own.  Big moves by the Fed will just cause problems later.  End the Fed's double mandate. Fed's job should be stable prices, period.

outragedpatriot
outragedpatriot

Obama amp; company are collapsing our Economy. This is a move to take over mortgages by the government. Please read related articles regarding record numbers of people collecting social security (that will be drained) extended unemployment benefits (that will be drained) record numbers on food stamps (that will be drained) . I hope America comes out of their swoon by November. 

LegalBagel
LegalBagel

There is much more to inflation than a simple domestic wage-push. 

LegalBagel
LegalBagel

Why is the money stashed off-shore?  Because there is no productive use for it on shore?  The money isn't out of the world economy -- it is just not directly involved in the local economy of the wealthy families.  Assuming the $32 Trillion is desposited, it is the basis for the banks to lend elsewhere. 

danlhul
danlhul

 Actually, over 20% of all mortgages are underwater. Whether people have confidence or not, they're not going to be able to refinance, or sell and buy a new home, until that's resolved. All this "help" only helps people NOT in that situation (but who would still lose money on paper if they sold) and that tiny portion of the market that are new buyers.

Expect it to take an extremely long time (as the government interferes with normal market processes to prevent a glut of foreclosures) like five to ten years--for the housing market to return to "normal"

And as someone else pointed out, the "stable price" mandate (which I agree should be the Fed's sole focus) means nothing as long as they're manipulating the set of things they use to track inflation.

garydpdx
garydpdx

 Inflation is measured by a limited 'basket of goods'.

There's a thing called Google ...

elioflight
elioflight

Oh really, banks are in the job of lending? That's news to me. All I can see is that they hoarded TARP money and wouldn't lend, pay a pittance of interest to savers, charge outrageous fees for diminishing services, and invest OUR money in risky schemes to line their pockets.

Is that hoarded money being used to create jobs? To build infrastructure. To care for the country and its people--they very people who HELPED them get that money.

Money is meant to be a tool in an economy, not a means to an end.

These people LOVE the United States SO much that they do all they can to avoid paying their fair share to the government and society from which they have benefited so much. They didn't get their wealth without us--labor, consumer, and taxpayer. They are the ones who are waging war on us. People will grow tired of sending their kids to bed hungry even though they have employment.

We ALL do better when there is SHARED wealth.

bkuykendall
bkuykendall

 The Fed is buying mortgage securities that are for properties that have already sold.  All it will accomplish is to take more toxic assets off of the bank books - another bail out.

bkuykendall
bkuykendall

 You are correct - more to the point it is CPI. (Consumer Price Index)

2009 CPI = 214.537

2010 CPI - 218.056

2011 CPI = 224.939

CPI as of August 2012 = 230.379

Looks like inflation to me.

Mary Waterton
Mary Waterton

 There is also a thing called "hedonic adjustment" whereby the government removes items from the basket that are inflating and add things that are not.

danlhul
danlhul

 Agree--it's another bail out. But the Fed's point is that buying existing mortgages will free up banks to make new ones. For the reasons stated above, I don't believe that this will work out--too many existing mortgages are underwater for it to have an affect.