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Professor Bernanke Warning of Paralysis Meets Fed Facing Same

Rich Miller:

Professor Bernanke Warning of Paralysis Meets Fed Facing Same: As a Princeton University professor, Ben Bernanke castigated the Bank of Japan in 2000 for a “case of self-induced paralysis” that led to a decade of stagnation. Now, the Federal Reserve chairman may be allowing the U.S. central bank to fall into the same trap after its second round of quantitative easing ends this month. By all but ruling out another cycle of bond purchases, Fed officials have left themselves with little in the way of policy options to respond to slowing growth and rising unemployment. This raises the risk that the U.S. will remain saddled with what Bernanke himself has called a “frustratingly” sluggish recovery that leaves millions of Americans out of work.

“I worry that QE3 will be hostage to QE2,” said Vincent Reinhart, a former director of the Fed’s monetary-affairs division who is now a scholar at the American Enterprise Institute in Washington. “That may lead to that self-induced paralysis” in further easing policy to aid the economy.... [A;;en]Sinai said. “If I were at the Fed, I’d be looking at ways to do something like QE3,” he added. Fed officials don’t seem so inclined. “We’ve done enough,” Federal Reserve Bank of Dallas President Richard Fisher said in a June 13 speech....

In a paper Bernanke wrote while at Princeton in 2000, he took Bank of Japan officials to task for saying they had done all they could to help an economy that had grown about 1 percent a year in the previous decade after the country’s real-estate bubble burst. While agreeing Japan faced structural problems that monetary policy couldn’t solve, including a broken banking system, Bernanke argued the central bank could do more to pump up demand beyond cutting short-term interest rates to zero. Among the steps he discussed were “nonstandard open-market operations,” including the purchase of Japanese government bonds -- just the sort of strategy the U.S. pursued under QE2....

Bernanke defended the Fed’s performance at a press conference following the central bank’s last meeting in April. “We have done extraordinary things in order to try to help this economy recover,” he said, pointing to the near-zero fed funds rate and two rounds of securities purchases.... If Bernanke says the “little blip in inflation is temporary and it’s going to go back below target, and he says he’s very unhappy with the unemployment rate, then why isn’t he doing more?” Gagnon asked. “It’s really ironic. It’s a self- induced paralysis.”