Former Fed chairman Ben Bernanke now seems to have a new passion as he’s really blogging away on the website of the Brookings Institution. In his most recent publication, Bernanke is actually defending the strategy of the Federal Reserve which –as we all know – expanded its balance sheet in order to provide more oxygen to the American economy.
Bernanke isn’t worried at all about the huge size of the balance sheet of the Federal Reserve and is contradicting the naysayers which said the balance sheet is now too large to allow the Quantitative Easing program to be unwound. According to Bernanke, the Fed has several tools it could use to mitigate the risks of unwinding QE and reducing the balance sheet.
Not surprisingly, he is also hinting at the possibility the Fed’s balance sheet could remain at elevated levels compared to the pre-crisis. He says several other central banks have large balance sheets and are able to keep all parameters of monetary policy under control.
Whilst this might be true (as you can see on the previous chart which pictures the size of the balance sheet of the central banks compared to the Gross Domestic Product of a country), but Bernanke seems to be missing the point here. It’s true, the relative size of the Fed’s balance sheet is roughly in line with the balance sheets of both the European Central Bank and the Bank of England, but that doesn’t mean an extended balance sheet is a great tool.
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The balance sheet of the Bank of England has been decreasing since 2012, albeit at a moderate pace, but it definitely does look like the ‘real’ British economy is doing much better than the American economy, despite having the Eurozone as its main trading partner. Let’s also keep in mind the balance sheet of the Federal Reserve has increased by almost 500% since the Global Financial Crisis erupted, and by advocating for a continuously expanded balance sheet, Bernanke seems to be unwilling to give the free market a fair chance to prove it has indeed recovered from one of the most severe shocks to the financial system in the history of mankind.
