Skip to comments.Fed Chairman Admits His Economic Model Is Japanese Economic Stagnation
Posted on 10/08/2012 6:43:45 AM PDT by IbJensen
Federal Reserve Chairman Ben Bernanke said in an October 1 speech that his U.S. central bank would copy Japanese economic policy to get the U.S. economy moving, despite the fact that the Japanese economy hasn't seen significant economic growth since the 1980s.
In that speech before the Economic Club of Indiana, Bernanke said he would keep suppressing interest rates in the United States over the long-term and purchasing long-term debt instruments, just as Japan has done. Bernanke, referring to suppression of U.S. interest rates in the domestic economy since the great recession began, noted:
Once at zero, the short-term interest rate could not be cut further, so our traditional policy tool for dealing with economic weakness was no longer available. Yet, with unemployment soaring, the economy and job market clearly needed more support. Central banks around the world found themselves in a similar predicament. We asked ourselves, "What do we do now?"
To answer this question, we could draw on the experience of Japan, where short-term interest rates have been near zero for many years.
The Japanese "experience" has been no significant economic growth since 1990, racking up the largest national government debt as a percentage of its economy of any advanced economy (230 percent of GDP, more than twice the U.S. figure), and several downgrades in their national credit rating in recent years.
Bernanke said he would also follow Japanese central bank policy on suppressing long-term interest rates by the purchase of debt and mortgage-backed securities, noting that the Fed had followed this policy since 2008, claiming tangible results:
When the Fed first announced purchases of mortgage-backed securities in late 2008, 30-year mortgage interest rates averaged a little above 6 percent; today they average about 3-1/2 percent. Lower mortgage rates are one reason for the improvement we have been seeing in the housing market....
The Fed's purchases reduce the amount of longer-term securities held by investors and put downward pressure on the interest rates on those securities. That downward pressure transmits to a wide range of interest rates that individuals and businesses pay.
Bernanke called for continued deficit spending, which Japan has continued throughout its two decades of no substantial economic growth, albeit Bernanke couched his recommendations in economic fuzzy-talk: They must find ways to put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near term. Of the so-called fiscal cliff much dreaded on Capitol Hill Bernanke added fuel to the fire if that were allowed to occur, it would likely throw the economy back into recession."
Bernanke also rebuffed claims that the Fed was monetizing the debt with the latest bout of quantitative easing" the purchase of $40 billion per month of federal and mortgage-backed securities into the indefinite future. No, that's not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates."
Of course, the Fed's recent policy of purchasing $40 billion of long-term debt instruments per month was deliberately announced with no end date, i.e., open-ended, making Bernanke's claim it was a temporary policy a lie.
Bernanke also revealed some concern in the Indianapolis, Indiana, speech over a renewed push for congressional oversight of the Fed in the face of unprecedented Federal Reserve policies. The American people have a right to know how the Federal Reserve is carrying out its responsibilities and how we are using taxpayer resources, Bernanke said, but he added that he would continue to oppose further congressional investigations into the Federal Reserve's secret bailout policies, such as the secret $16 trillion Federal Reserve bailout of elite banks during the height of the 2008-09 recession. Bernanke's comments must be seen in light of the move led by Congressman Ron Paul to create an independent audit of the Federal Reserve Bank by Congress' Office of the Inspector General.
After he made this statement did anyone call him out on this?
He patterns after an economy that is failling as much as our own, if no one did comment on this then we are as bad off as I have thought for a long time. Our one government refuses to do what is best for the country and the American people but no one has stepped up and called for one resignation.
I see a lot of complaining about this politition or Obama with all he has done to ruin us, refusing to follow the constitution and not once has anyone called any of them to task. Even this publication keeps sending out reports but not much else.
Obama's and Bernanke's school of thought doesn't think they are actually creating money when they "print" it, because they only believe money is created in use, not is the act creating credit. It's completely illogical, and has been since John Law thought it up. Bernanke wants to put us back on the installment plan or pyramid scheme that banks have always run. You can certainly call it fascism since no independent savers and producers are involved. But there's really no point in trying to reason with him, or any of them - they are true believers - and I suppose they'll end up being "eased" themselves if only Americans wake up before it's too late!
Maybe Krugman would be a better choice for Fed Chair? Couldn’t really be worse ...
Dr. Ron Paul would be a good choice for Fed.
Joe Arpaio would make an excellent AG.
Gov. Palin for Secretary of State.
Hillary and Washerwoman-Schultz for cleaning women.
I’ve noticed this as well - Japan and America both have near 0% interest rates and huge Debt/GDP ratios. The difference is that Japan has 5% unemployment on a bad day.
Some years ago I wrote a PhD thesis on the Japanese template and why no other nation should use it. They did.
>>Some years ago I wrote a PhD thesis on the Japanese template and why no other nation should use it. They did.
Yeah, the sad reality is that the government pushed the bubble so hard in the 80s that people were literally throwing money away or hiding it to escape taxes. Then the bubble burst, and no one has the kintama to go to the Japanese public and say, look, things need to change or we’ll be in this slump permanently.
How incongruous that savings has been severely discouraged in this highly dangerous game being played out right before our eyes.
Americans who save money in a 0 interest account makes as much sense as voting for this evil administration again!
1. I’ve known a couple people who have been living the Japanese recession their entire lives (young people). It stinks! There is no hope of getting ahead. For one young woman I know, there has been no family vacation since a camping trip when she was very little. There is only a six day work week, and on Sunday, she goes to the mall to window shop and have a snack and go home. And there is no reason this will not continue indefinitely, for years. And there are a lot of others in Japan like her.
2. Old people who need to earn bank interest have found this sustained period of earning miniscule interest to be devastating. In fact, anybody at the start of life who wants to build a nest egg for investing later needs to earn a reasonable amount of interest to get started. Bernanke is punishing the young and the old.
Also, if there is not money to be made in making loans at an interest rate that is reasonable, is it any wonder that banks get into other bits of trouble with other schemes. Banks should get back to doing what they’re supposed to do to make money.
And the Treasury will pay back those bonds (interest included!) with what money exactly? Easy: sell Treasury Bonds.
...wait, paying off one credit card with another doesn't work.
At 0% interest, the point is simple storage. Parking a relatively large sum (to you) at home isn’t smart. Businesses needing to stash millions or billions of $$$ somewhere aren’t going to build a vault and stick it there. Heck, the economy _can’t_ handle people stashing large amounts of physical cash because there just isn’t enough: there exists about $2T in cash, but $15T in claims thereon - should there be a run on cash, deflation would be huge and the economy would crash for want of physical cash.
While a lot of folks on FR love to blame Obama for the economy, it's so much bigger than him, Bernake, or any other government to handle, because the contraction is global.
All these rounds of QE are not helping. They are prolonging the pain.
The next President (please, God, let it be Romney!) will NOT be able to use all the traditional methods to stimulate America out of this contraction (Bernake has used them already). The only thing the next President can do is position the US to survive the second half of the contraction, which will be worse than the first.
What I'm looking for is someone to stand in the bully pulpit and say all of that. Explain to people that government charity doesn't work, that social security is a scam, that inflation has been a silent tax and has been used as a government policy, that the entire world has been going down a bad path. I want to hear someone say it, and then lay out some sort of plan that will put us on a different road.
Unfortunately, if Romney had the guts to say this (he and Ryan have danced around the edges quite a bit), he probably would never see the inside of the White House without the help of a tour guide.
Americans' heads would explode.
The only way to put America on a different path is to allow all those "too big to fail" companies to fail. Lots of people (not just the "wealthy") will get financially crushed. Instead of putting the patient in jeopardy for the sake of saving one diseased limb, cut off the limb. The patient will survive, but life will be very different.
Although I don’t really expect politicians to do the right thing, if the GOP were to possibly win the White House, the Senate and the House, I would like Romney to get them into a big room and explain what our Founding Fathers risked, and what they sacrificed in order to create this country. Now is the time. We do not risk so much, and we will not sacrifice so much — but we must put it on the line. We must be bold, and we must do what is right. Perhaps that will mean that our re-election will be tough or impossible, but history is watching, and there are many things our government has been doing which it must cease to do, and then bear the consequences.
>>How incongruous that savings has been severely discouraged in this highly dangerous game being played out right before our eyes.
>>Americans who save money in a 0 interest account makes as much sense as voting for this evil administration again!
The irony is that Japanese are ravenous savers. Every family has their “hesokuri” hidden somewhere in their house because the money in their bank account accrues no interest. The Japanese gov’t could actually bolster both the desire to save and the banking sector by allowing the interest% to rise a couple of points.
Americans used to make at least 2-3% on their savings, which encouraged them to put up money in case disaster strikes. In 2008, disaster strikes and guess what, no one has saved anything.
It’s all so stupid.
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