(*I wrote this exactly 2 years ago today. I stumbled across it this evening. Most of it still holds.)
In the shadow of the Grand Tetons Ben Bernanke again assured the world not to worry, the Fed wasn’t in fact “out of ammunition.” There were still many weapons in the Federal Reserve arsenal.
Sure there are many things the Fed can still do, some more QE, the Fed Chairman climbing into his helicopter as he said he would and raining hundred dollar bills upon the public, etc. But really what is the exit strategy?
Its fair to say that now is no time to be considering an exit strategy. (Fair, but unwise.) We are in the midst of an economic war after all and the fighting seems to be intensifying. How can one think about exiting the war at this point? Truly this is putting the cart before the horse many would say, including the shamans at the FED, at least publicly.
The thing is if the economic crisis is a war, it is increasingly starting to feel like Vietnam, or Afghanistan. We are in an economic quagmire with no end in sight.
Bernanke increasingly sounds like that genius of a generation ago, Secretary of Defense Robert McNamara. Lets just ramp up operations Benanke says. Lets just drop some more economic bombs. The Fed is the most powerful economic force in the world, surely it should be able to solve this economic challenge using that vast tools at its disposal.
Unfortunately, like McNamara was by say 1966, Bernanke is now hemmed in. Each additional action just makes the situation worse. It escalates the economic “war” which in the end demands a radically different tack for “success.”
McNamara supposedly came to see that his own strategies in Vietnam would not work toward the end of his tenor. This conclusion came of course after the death of tens of thousands of American soldiers.
I wonder if Benanke now feels the same. I wonder if he sits in his office and feels the futility of his efforts, and indeed how he has made things worse, or is unable to come to this conclusion because his ego will not allow him to. I would love to know.
So now Bernanke says that the Fed will redouble it’s efforts in the face of a deepening economic trough. But by doing this he will have to increasingly debase the economy. Sounds almost like Bernanke subscribes to the old “you’ve got to destroy a village to save it” theory.
In some ways Robert McNamara had it easier than Bernanke. Sure American prestige and power was at stake in Vietnam, but the war could be ended. We could always just pack up and go home, which in the end we did.
This is not an option for the Fed in the current economic quagmire. There is nowhere for Bernanke to retreat to. When armies feel cornered, when things are going badly and the options increasingly begin to run out, the leaders of armies often resort to undisciplined and rash decisions. There is simply no other choice. It is either this, or utter defeat. No leader of an army wants to be defeated. But to be vanquished is the worst kind of defeat.
The Fed and it’s Keynesian army now face complete defeat. I wonder if Bernanke knows this yet. It took McNamara a decade to come to terms with his debacle. We can’t afford the same luxury with Bernanke.