Uneasy Money

Obviously upset at Tuesday’s election results, Mary Anastasia O’Grady, member of the Wall Street Journal editorial board, takes out her frustration on Ben Bernanke, accusing Mr. Bernanke of buying the election for Mr. Obama. I mean who needs Sheldon Adelson when you’ve got the Chairman of the Federal Reserve Board out there working for you day and night?

Which brings us to whom Mr. Obama, if he is going to be honest, ought to thank for his victory. It is the man behind the curtain at the Federal Reserve in Washington. By pulling the monetary levers driving credit—fast and furiously and out of the view of most Americans—Fed Chairman Ben Bernanke artificially juiced asset prices and the housing market just in time for Election Day.

If you doubt that, consider this: The total return on the S&P 500 from the beginning of this election year until yesterday was almost 13.9%. The Dow Jones Industrial Average returned almost 9.2%. That means that as millions of Americans have opened their monthly 401 (K) statement this year, they have been under the impression that the losses they suffered after the 2008 financial crisis are being recovered. There has also been a recovery in a number of housing markets around the country.

Now lest you think that rising stock prices and a bottoming out of housing prices show that Mr. Bernanke is ably discharging his responsibilities as Fed Chairman, Mrs. O’Grady proceeds to explain why you are being taken for a sucker by a con artist.

That cheap credit and the search for yield is driving what is likely to become another bubble may not be appreciated by these investors. Instead, it is not unreasonable to suggest that some significant number, having had their portfolios injected with Mr. Bernanke’s feel-good monetary stimulus, decided that Mr. Obama is in fact making them better off.

But are near-zero interest rates and the central bank financing of the U.S. government, through quantitative easing, sustainable policies? To put it another way, can the Fed print our way out of economic and fiscal troubles? If that were possible, Argentina would be a rich country. Instead it is poor and its political system is dominated by leftwing populist demagogues.

Mrs. O’Grady has a point. A country cannot permanently increase its output beyond what its available resources are capable of producing. A poor country cannot become rich by inflating its currency. The problem in the US is not that we lack resources, but that we are not utilizing the resources that are available. There are millions of people not working, something that Mrs. O’Grady’s preferred candidate for President spent a fair amount of time repeating for more than a year. The question is not whether monetary policy can create resources that don’t exist, but whether monetary policy can help get idle resources back to work. Perhaps monetary policy can’t do that.  After all, there are some smart people who don’t think it can.  But we do have a lot of evidence that bad monetary policy does cause high unemployment, as in the Great Depression. And some of us are old enough to remember when, during the Reagan administration, the Wall Street Journal editorial page was continually berating Paul Volcker for holding back a recovery by keeping monetary policy too tight and interest rates too high. The evidence shows that in deep depressions currency devaluation and inflation can work wonders, as FDR proved in 1933. It even worked for Argentina after its financial crisis in 2001. The disastrous policies of the past several years don’t mean that monetary expansion was not instrumental for Argentina’s recovery from the earlier crisis.