La compra mamut no es lo mismo que la compra de un mamut

REVIEW & OUTLOOK MARCH 20, 2009 Secretary of the Fed In case there was any residual doubt, the Bernanke Fed threw itself all in this week to unlock financial markets and spur the economy. With its announced plan to make a mammoth purchase of Treasury securities, the Fed essentially said that the considerable risks of future inflation and permanent damage to the Fed's political independence are details that can be put off, or cleaned up, at a later date. Whatever else people will say about his chairmanship, Ben Bernanke does not want deflation or Depression on his resume. It's important to understand the historic nature of what the Fed is doing. In buying $300 billion worth of long-end Treasurys, it is directly monetizing U.S. government debt. This is what the Federal Reserve did during World War II to finance U.S. government borrowing, before the Fed broke the pattern in a very public spat with the Truman Administration during the Korean War. Now the Bernanke Fed is once again making itself a debt agent of the Treasury, using its balance sheet to finance Congressional spending. Corbis William McChesney Martin Jr. It is also monetizing U.S. debt indirectly with the huge expansion of its direct purchase program of mortgage-backed securities (MBS). It was $500 billion, and now it will add $750 billion more "this year." Foreign governments have been getting out of Fannie and Freddie MBSs in recent months and going into Treasurys. Thus the Fed is essentially substituting as these foreign governments finance U.S. debt by buying presumably safer Treasurys. The purpose of these actions is to keep rates low on both Treasurys and MBSs, and to keep the cost of funds low for banks and especially for home buyers. It worked on Tuesday; long bond and mortgage rates fell. The case for doing all this is that the Fed needs to supply dollars at a time when money velocity is low and the world demand for dollars is high amid the global recession. As long as the world keeps demanding dollars, the Fed can get away with this extraordinary credit creation. That said, bear in mind that the Fed's balance sheet has more than doubled since September -- to $1.9 trillion from $900 billion. These latest commitments mean it may more than double again, close to $4 trillion. That would be about 30% of GDP, up from about 7%. The market reaction clearly showed the implied risks, with gold leaping and the dollar taking a dive the past two days. As the economy improves, and thus as the velocity of money increases, the risk of inflation will soar. Mr. Bernanke says the Fed can remove the money fast, but central bankers always say that and rarely do. The Fed statement isn't reassuring on that point. It says, "the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term." The Fed seems to be saying it wants a little inflation, which we know from history can easily become a big inflation or another asset bubble. The last time the Fed cut rates to very low levels to fight "deflation," we ended up with the housing bubble and mortgage mania. The other great, and less appreciated, danger is political. The Bernanke Fed has now dropped even the pretense of independence and has made itself an agent of the Treasury, which means of politicians. With its many new credit facilities -- the TALF and the others -- it is making credit allocation decisions across the economy. If a business borrower qualifies for one of these facilities, it gets cheaper money. If it doesn't, it's out of luck. Thus the scramble by so many nonbanks to become bank holding companies, so they can tap the Fed's well of cheap credit. The question is how the Fed will withdraw from all of this unchartered territory now that it has moved into it. How will it wean companies off easy credit, especially since some companies may need it to survive? What happens when Members of Congress lobby the Fed to keep credit loose for auto loans to help Detroit, or credit cards to help Amex? House Speaker Pelosi yesterday gave a taste, saying the AIG bailout was the Fed's idea "without any prior notification to us." Mr. Bernanke, meet your new partners. Above all, the Treasury and Congress won't be happy if the Fed decides to stop buying Treasurys and the result is a big increase in government borrowing costs. This was the source of the dispute between the Federal Reserve and the Truman Treasury. The Fed wanted to raise rates amid rising inflation, while the Truman Treasury wanted cheap financing for Korea and its domestic priorities. The Fed prevailed in the famous "Accord" of 1951, thanks to a young assistant secretary of the Treasury named William McChesney Martin. He would go on to become Fed Chairman and create the modern era of Fed independence. The U.S. and the Fed are going to need another Martin, sooner rather than later. Please add your comments to the Opinion Journal forum. Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved Copyright ©2009 Dow Jones & Company, Inc. All Rights Reserved

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