TJP

Today, the Federal Reserve (Fed) Chairman, Bernanke, issued new economic projections indicating slower growth, higher unemployment, and higher inflation than previously predicted. It is clear that Bernanke and the Fed failed to revive the economy.

In a monetary/pure credit economy, such as US, failure to implement effective monetary policy is detrimental to the lives of citizens and the nation’s security.

Thus, Americans require from the Administration and Congress individuals at the helm of the Fed that can quickly understand the core monetary problems and challenges of the US economy and implement effective policies to remedy the roots of ineffective outcomes: low demand and high unemployment.

The current leadership at the Fed has proven to be incapable of reversing the current downward unemployment spiral.  Therefore, it is time to take the monetary keys away from Bernanke.

The unemployed need no more “headwinds” excuses from Bernanke, they need jobs. Bernanke argued that bank credit tightness and high gas prices are to be blamed for the current slowdown. However, on March 01, 2011, he asserted, “Rising gasoline prices aren’t yet a significant risk to the U.S. economic recovery.”

Clearly Mr. Bernanke seems to be confused on the effect of gasoline prices on consumers budget, as well as how to implement the Fed's mission. Americans need a steady hand at the helm of the Federal Reserve and thus far, it is not Mr. Bernanke.

As an economic historian, Bernanke should know that lending to consumers leads to effective demand and hence job creation. Therefore, if bailed out banks tightened their lending standards to starve the economy; he should have quickly moved to explain the potential adverse outcomes on the US economy and security to the President, Congress and the public.

Moreover, like a chess master he should have had an effective strategy against banks’ gamesmanship. For instance, he could have recommended to the President and Congress the establishment of Federally sponsored credit agencies that would provide liquidity to consumers and small businesses. And, called in taxpayers’ bailed out money from the greedy banks.

And, he should have stopped paying interest on bank reserves. Interest on bank reserves provides a disincentive for bank lending. Finally, he should have raised interest rates. The supply of money is a function of the interest; at higher rates banks supply more loans, thus expanding the credit.

At the outset, I argued that reappointing of Bernanke was a mistake. Bernanke is a proponent of inflation targeting, a policy that reduces the money supply, M1, supposedly to control inflation. However, when the stock of real money balances is insufficient to meet the demand for real money balances, the supply of financial assets, which includes residential housing, will exceed the demand and prices will fall (i.e., housing prices).

By examining the money supply graph, the reader can see that recessions are preceded by flat monetary growth. Thus, the problem with the economy is, in part, mismanagement by the Fed.

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