Don’t Blame the Fed for Holding Back the Recovery

Rick Perry must not spend much time in banks.

How else can you interpret his accusation that Ben Bernanke, the Chairman of the Federal Reserve, “is almost treasonous” for “printing money”?

He must think that banks spend every dollar they get from the Fed. He must think that banks depend solely on the Fed for funding. Because that’s the only way that “printing money” — if that’s even what you could call what the Fed does — could result in any damage for the United States.

Rick Perry lives in the Bizarro World of Banking.

Here on Planet Earth, U.S. banks are holding $1.6 trillion in excess reserves. That’s $1.6 trillion that they’re not spending or loaning or investing. It’s just sitting there. Not doing anything for the economy.

Just to give you a little context, before this recession, excess reserves had never been higher than $20 billion.

In other words, most of the money that Perry is so angry about is just minding its own business. Nobody is spending it. Nobody is borrowing it. It’s not contributing to inflation or the depreciation of the dollar. It’s not eroding your purchasing power.  

The only way it can do any of those things is if banks lend it, and banks won’t lend it until consumers start to look creditworthy again, and consumers won’t start to look creditworthy again until they get back the jobs they lost — which Perry says won’t happen as long as Barack Obama is in office. So I don’t know what he’s worried about.

Either he’s worried that the economy will grow too fast — in which case we might experience rising inflation — or he’s worried that the economy will grow too slow — in which case the jobs will stay out of reach and the money will stay in the vaults. But he can’t have it both ways.

See, banks don’t lend money just because they have it. They lend it because they want to make money. When the economy is growing 1 percent per year, there aren’t a lot of opportunities to make money.

When there are opportunities, they don’t wait for the Fed to give them the money. They make the loan first, and they worry about how to fund it later. They can always get cash from somewhere: if not from the Fed, then from other banks, big investors, new depositors, or sales of other assets. The only time they lack access to cash is during a “credit crunch” like we experienced in late 2008. That’s when the Fed becomes the “lender of last resort” and prevents a massive wave of bankruptcies.

But let’s pretend that there’s some way for the Fed’s policy to spur a tidal wave of inflation amid a grindingly torpid economy.

Where, pray tell, is this inflation? It’s not in the core Consumer Price Index, which grew 1.8 percent in the past year, lower than it was at any point in the 1970s, 1980s, or 1990s. It’s not in the core Personal Consumption Expenditures Price Index, which grew 1.6 percent in the last year, also lower than it was in the previous four decades. It’s not in the market’s expectations of future inflation, which is also less than 2 percent. It’s not in workers’ wages, which are also growing less than 2 percent annually.

It’s not in commodities, whose prices have fallen since peaking earlier this year. Besides, according to the San Francisco Fed, commodities only account for 5 percent of personal consumption, hardly enough to have a lasting influence on overall inflation. (According to recent research, we tend to overestimate their impact because we see food and gas prices so often.)

And the dollar has been depreciating since 2002, so we can’t blame that on Bernanke, who’s only been in office since 2006. Besides, the weaker dollar has made exports cheaper, and export growth has been one of the few reliable sources of GDP growth in this recovery.

Eventually, though, banks will want to lend that $1.6 trillion. Bernanke has been preparing for that moment. Under his leadership, the Fed has introduced a new policy of paying interest on reserves. All he has to do is raise that interest rate, and banks will stop lending their excess reserves so they can earn all that interest income.

Sorry, Governor. Your treason accusation won’t hold up in a court of law. You’ll have to find someone else to hang. And we’ll all have to find someone else to blame for this weak economy.


An abbreviated version of this op-ed was published in today’s South Florida Sun-Sentinel, alongside an opposing view from Prof. Chandra Mishra of Florida Atlantic University. Prompted by Governor Perry’s comments, we were answering the question: “Is the Fed hurting or helping in our economic recovery?”