Continued from page 2

“More fundamentally, the world has changed,” he said, with the global economy much larger, more complex and interconnected than it was in the 1930s, and people and politicians much more concerned about the Fed potentially throwing millions of people out of work.

“If you look at history, the gold standard didn’t work that well, and it worked particularly poorly after World War I,” he said. “There’s good evidence the gold standard was one of the reasons the Depression was so deep and long. Those countries that allowed flexibility in their exchange rates recovered more quickly than those that stayed on gold to the bitter end.”

Mr. Bernanke addresses another school of conservative critics led by Peter Schiff, president of Euro Pacific Capital Inc., who say the Fed’s unprecedented programs since 2009 to purchase Treasury bonds and mortgage bonds in an effort to lower long-term interest rates in reality are a thinly veiled effort to print money to finance the government’s bloated deficits.

They say this is a big mistake that will lead at some point to a run on the dollar and Treasury bonds, end the dollar’s long reign as the world’s reserve currency, and create a debilitating run of inflation.

Rebutting Bernanke

Like the liquidationists during the 1930s, Mr. Schiff advocates a hands-off policy that lets markets resolve bad debts through massive liquidations of housing and defaulted mortgage bonds.

Mr. Schiff has scheduled what he is calling a “nonpoliticized” lecture to rebut Mr. Bernanke’s arguments Thursday while the Fed chairman is delivering his last lecture addressing the 2008 financial crisis.

Rather than keeping bank lending rates near zero, Peter Schiff said, interest rates should be anywhere from 2 percentage points to 4 percentage points higher to compensate investors for higher inflation, said Andrew Schiff, his brother and spokesman.

Keeping rates so low “creates all kinds of economic problems and encourages all kinds of destructive economic behavior,” Andrew Schiff said, including overleveraging by investors seeking to take advantage of low rates to maximize their positions in bonds, stocks and other markets. Such overleveraging often leads to investment bubbles.

While Mr. Bernanke intends for the low rates to encourage more lending by banks to consumers and businesses, that is not happening, Andrew Schiff said. Instead, banks are borrowing at near-zero from the Fed and then investing in Treasury bonds to earn a 2 percent return risk-free.

“This is not a good way to help the economy” and only lets the government go further into debt, he said.

Peter Schiff agrees that the central bank helped cause the Depression, but for different reasons than expounded by Mr. Bernanke. He blames too-loose money policies during the 1920s for creating stock and real estate bubbles, a mistake he says the Fed repeated during the 2000s, fostering the real estate bubble — a charge Mr. Bernanke denies.

Regardless of who wins the debate, one clear outcome of Mr. Bernanke’s clash with conservatives is that he has little chance of being reappointed if a Republican wins the presidential election this year.

Jeffrey Kleintop, chief market strategist at LPL Financial, said Mr. Bernanke is at odds with most Republican candidates, who “indicate that they would favor a less-cautious Fed and an earlier start to getting interest rates back up to more normal levels.”

One former candidate, Texas Gov. Rick Perry, called Mr. Bernanke’s policies “treasonous” and suggested that he would fire him if elected, although that would not be possible because the Fed chairman cannot be removed until his term expires in 2014 unless he commits an impeachable offense. But Mr. Bernanke already has indicated that he would announce his retirement rather than seek another term.

Story Continues →