Recently while watching Mike Maloney I saw him picking up on Ben Bernanke’s talk from 2002. Fourteen years in the world of finance is an era but Bernanke’s words are still actual and important. With hindsight, it was an announcement of what governments and central banks were about to do.

Ben the Prophet

Bernanke’s speech can be divided into two main parts. First one reflects on the situation when deflation drives down interest rates near the zero area. Former chairman of the FED brought several experts’ opinion that moving interest rate near zero levels would leave central banks with “no ammo”. In other words, the central bank is going to be left without a tool to stimulate the economy.

I want to point out that in the case of monetary policy the government and the central bank cooperates so tightly that they will be used interchangeably.

Later, in his speech, Bernanke in very diplomatic language suggested that ZIRP environment does not curtail options of the central bank. Next, he mentioned that a system based on fiat money gives the government ability to freely increase spending and ramp up the inflation rate. This way the government can print more dollars (thanks to the central bank) which results in currency power diminishing, Bernanke added. He highlighted that “a determined government can always create inflation.”

To summarize the first part of Bernanke’s speech, we can conclude that he already had knowledge about the problem of indebtedness growing bigger and bigger on the horizon back in 2002. Most probably he had his own vision of how to solve this problem – one that would take care of the “too big to fail” banks during Ben Bernanke’s term in the FED.

Modern central banking

In the second part of his address, Bernanke focused on the action plan enabling central banks to keep control over the monetary system. Again, this talk happened back in 2002 and most of this material sounded like a science-fiction to many.