WASHINGTON — Federal Reserve Board Chairman Ben Bernanke was the host of his own version of Discovery Channel's television series MythBusters this week.
Instead of explaining if it's possible to beat a lie detector test, however, he tried to rid long-held myths like the Fed's power to print money at will. Let's hope certain members of Congress were listening.
As part of a four-part series, Bernanke gave his final two lectures to business students at George Washington University on the Fed's role and response to the recent financial crisis. But along the way, he clarified certain misperceptions of the central bank to some 30 students — and the rest of the public, who was tuned in via Web cast.
The Fed has been criticized heavily for its recent monetary policy actions to help boost a sluggish U.S. economy. It's kept the federal funds rate to near zero levels since December 2008, a move that is likely to continue for a few more years. It's also engaged in large-scale asset purchases, known more commonly as quantitative easing, to help draw down longer-term interest rates.
In a candid moment, Bernanke revealed he favors calling the Fed's actions LSAPs, rather than QE as those in the press have coined it.
"I won't get into why I think LSAP is a better descriptive name, but in any case, I've had to bow the common usage," Bernanke confided.
Such unprecedented policy actions have left a bundle of questions among lawmakers and the public about the Fed's quantitative easing — another way to help lower interest rates. So, here's a look at Bernanke's monetary myth busting:
No. 1: The Fed is printing money under QE.
Not true. "Sometimes you hear that the Fed is printing money in order to pay for the securities we acquire," said Bernanke. "As a literal fact, the Fed is not printing money to acquire these securities."
Moreover, the amount of currency in circulation has not been affected by either round of QE, he said. Instead, reserve balances — accounts commercial banks hold with the Fed — have risen as a result. "They basically just sit there. They're not in circulation. They're not part of any broad measure of the money supply. They're part of what's called the monetary base. But again… they certainly aren't cash."
No. 2: So this is a form of government spending, right?
Nope. "This is not a form of government spending," said Bernanke. "It doesn't show up as government spending, because we're not actually spending money."
Rather, the Fed is buying up assets of U.S. Treasuries and mortgage-backed securities, which will eventually be sold back to the market, so the value of those purchases will be earned back.
No. 3: Two trillion dollars seems like a lot to have on the Fed's balance sheet.
Yes and no. "Just to be absolutely clear, even under all of the most normal circumstances, the Fed always owns a substantial amount of U.S. Treasuries," said Bernanke.
The Fed owned roughly $800 billion of U.S. Treasuries even before the crisis began, so that factor has to be weighed, too. "It's not like we began buying them from scratch. We've always owned a significant amount of these securities," said Bernanke.
No. 4: Taxpayers don't see any benefit from the Fed's actions.
Yes, they do. "The Fed gets interest, of course, on the securities that we hold," said Bernanke, "we actually make a very nice profit on these LSAP."
Over the last three years, the Fed has transferred roughly $200 billion in profits to the Treasury Department, which is used to actually drawdown the deficit. "So these actions are not deficit-increasing. They are, in fact, significantly deficit-reducing."
No. 5: Monetary policy is the same thing as fiscal policy.
Wrong, again. "A lot of people don't make a very good distinction between monetary and fiscal policy," said Bernanke. "Fiscal policy is the spending and taxation tools of the federal government. Monetary policy has to do with the Fed's management of interest rates. These are very different tools."
