3 Questions Ben Bernanke Needs to Answer


As Fed Chairman Ben Bernanke heads to Capitol Hill today, here are three questions I hope members of Congress will have the good sense to ask:

1. Why didn't the Fed act more forcefully on the LIBOR-rigging scandal?
The London Interbank Offered Rate rigging scandal has already cost Barclays (NYS: BCS) its pugnacious chief executive, Bob Diamond, and it could end up costing Paul Tucker, deputy governor of the Bank of England, the top job at the BoE. However, information that the Fed has provided in response to a Congressional request on the matter shows the U.S. central bank was aware in 2008 that Barclays was submitting LIBOR rates that were too low. Given this knowledge, and with the Department of Justice now preparing criminal cases against individuals and banks involved in the scandal, it's natural to wonder: Why didn't the Fed act more aggressively four years ago?

2. If the Fed can do more to support the economy, why isn't it doing it already?
Many pundits and Fed-watchers were expecting another round of quantitative easing from the Fed's last policy meeting in June and were disappointed when the central bank chose instead to extend "Operation Twist." Mr. Bernanke made it clear during the press conference following the meeting that the Fed has other tools at its disposal. With unemployment still hovering above 8%, why hasn't the Fed launched another round of outright bond purchases?

Note that I am not advocating this policy, but I think Mr. Bernanke has done an inadequate job of articulating the risks associated with extraordinary monetary policy measures, including quantitative easing. Those risks are genuine; investors and politicians need to understand that there is no such thing as "free money."

3. Is the stock market too focused on the Fed?
In June, two of the Fed's own economists published a paper that concluded that "since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) [monetary policy] announcements."

The "Greenspan/Bernanke put" is a reality. One of the risks of extraordinary monetary policy is that it tends to reinforce that source of moral hazard. This finding suggests to me that investors already spend too much time trying to anticipate what the Fed does.

Forget Fed-watching, because "These Stocks Could Skyrocket After the Next Presidential Election."

The article 3 Questions Ben Bernanke Needs to Answer originally appeared on Fool.com.

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