It's Not Bernanke, Mr. President, It's You

 | Jun 19, 2013 | 3:00 PM EDT
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On Monday, President Obama fired Fed Chairman Ben Bernanke. At least that's how it sounds from comments he made on the Charlie Rose show. Here's exactly what the president said:

"Well, I think Ben Bernanke's done an outstanding job. Ben Bernanke's a little bit like Bob Mueller, the head of the FBI -- where he's already stayed a lot longer than he wanted or he was supposed to."

Speculation has now begun on who will replace Bernanke, and Janet Yellen holds the early lead. Because of this, she's already being called the most powerful woman in the world. Sorry, but let me just say that she's far from it.

Frankly, I hate when people ascribe all this power to the Fed chief. It's basically a functionary's job. You set rates. Wow. That's like saying John Kenneth Galbraith, who ran the government's price-setting board during World War II, was the second most powerful man in the world at the time.

Are you kidding? More powerful than Churchill, Stalin, Adolf Hitler? Most people have never even heard of John Kenneth Galbraith, and I'm sure even fewer can name who the Fed chairman was in the 1940s. We should stop attributing so much power to the role of Fed chairman.

Obama's comments and seeming impatience with Bernanke seemed to come out of frustration, and they highlight a false understanding of the Fed's role and what it can and cannot do. Obama clearly wants a better economy and more jobs, and he seems to believe that the Fed, under Bernanke, has somehow failed to make that happen.

But Obama and other Fed critics should open their eyes. What they think they are seeing is just not there. They've got it wrong. Monetary policy cannot create jobs, because it cannot raise aggregate demand. There is no direct link from monetary policy to higher consumption, higher business sales, higher orders for goods and services and, hence, higher employment. None. Nor can monetary policy provide the training or skills for people to become more productive. It can't even provide the money for that training.

Only the federal government can do that.

People say that government spending doesn't work, that it can't create jobs. Well, tell that to the defense industry. Tell it to companies like Boeing (BA) and Northrop Grumman (NOC) and Lockheed Martin (LMT) and Raytheon (RTN) and the thousands of other companies and their employees that work in that industry. They all rely on the government for their bread and butter, and the goods they produce, the tanks, planes, ships, missiles and all the other defense hardware and software, are part of the U.S.' stock of real assets (wealth).

These items could just as well be bridges, roads, tunnels, schools, teachers, hospitals and whatever else if we desired, if that were a national priority like defense is.

Obama needs to look at himself, not Bernanke. As president he holds the key to getting the economy going and putting people back to work. The central bank has very limited means to do this, if it has the means at all. Did Abraham Lincoln ask a banker to finance the North's war against the secessionist South? No, he used the Constitution and the nation's power to create money. Lincoln issued currency.

I've been all through this. What the Fed can do is very limited. You lower interest rates, and you take income away from someone (a saver), and at the same time you're giving it to someone else (a debtor), so net-net, at best, it's zero sum. And realistically, it's probably even negative because of that lost interest income. The Fed even has studies on this that say as much.

Unfortunately, Obama seems to believe that the economy's failure is Bernanke's failure. And please, don't get me wrong, I am not necessarily sticking up for Ben. No matter who Obama ends up selecting to lead the Fed, we're going to see the same result, because from the top down, they all apparently believe that the Fed is in charge of the economy, when it's not much more than a bit player.

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