Bernanke Leaves Door Open for More Easing, Chides Congress

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Ben Bernanke 2.0 turned out to be a lot more sober than the original version.

Last year, at the annual Federal Reserve symposium in Jackson Hole, Bernanke outlined an array of monetary policy options, including what came to be known as QE2 for "quantitative easing," a second dose of the nation's central bank buying up hundreds of billions of dollars in assets held by financial instituions in order to boost money supply.

But with the U.S. economy moribund—growth in the second-quarter gross domestic product was revised downward today to 1.0 percent from an already weak 1.3 percent—Bernanke has few options left. So, he spoke instead of doing all that is possible to keep the economy afloat while tossing a few barbs in the direction of Capitol Hill. But that was enough to send the stock market soaring, even though Hurricane Irene was steaming full speed toward Wall Street.

[Read about how Rick Perry pushed Bernanke into the political limelight.]

In his long-awaited remarks, Bernanke asserted that the Fed "has a range of tools that could be used to provide additional monetary stimulus," and that the central bank would continue to consider those tools at the September Federal Open Market Committee meeting, which has now been extended from one day to two days. Instead, Bernanke emphasized the need for sound economic policy on a broader scale, touching briefly on a range of topics, including housing, trade, taxation, education, healthcare, and the recent debt ceiling fight.

Bernanke's lack of expansiveness surprised some. "I would have expected him to expand a little bit more on [the possibility of more monetary stimulus], and instead, he kept his cards very close to his vest this time around, which is different from one year ago," says Adolfo Laurenti, deputy chief economist at Mesirow Financial, a Chicago-based financial services firm.

Bernanke instead spent a significant portion of his speech examining the financial crisis, recession, and recovery that created the current U.S. economic situation, and then addressed broader economic conditions that could affect future growth, like weaknesses in the educational system and an aging population. He also emphasized the need for creating a "sustainable path" for U.S. fiscal policy without disregarding the "fragility of the current economic recovery."

The Fed chairman also issued a rebuke to Capitol Hill for the recent shenanigans over the debt ceiling. As the final point in his speech, Bernanke noted that the months-long fight over whether to pay the nation's bills could lead to future troubles, including a global crisis of confidence. "The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses," he said.

[See how EU austerity could hurt economic growth.]

The pointedness of these remarks was uncharacteristic of the rhetoric that usually emanates from the cloisters of the Fed. "I think it was interesting the emphasis the chairman put on discussing fiscal policy and policy-making at large," says Laurenti. "I really think the surprising thing to me was how broad his remarks were, and I think that was an implicit rebuke of the debacle that we have seen [surrounding raising the debt ceiling]. He was very explicit about that."

While the speech did not include specific discussion of further monetary stimulus, it also did not rule out such a move. In fact, Bernanke's remarks hinted that the door is still open to further easing. Bernanke said that the FOMC "is prepared to employ its tools as appropriate," and also crucially discounted the risk of inflation, saying that the Fed expects inflation to "settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most [Federal Open Market] Committee participants view as being consistent with our dual mandate." This is a key point, as one drawback to major monetary stimulus is the possibility of spurring or accelerating inflation.

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What Bernanke Might Say to His GOP Critics

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To: Mitch McConnell, John Boehner, Jon Kyl, Eric Cantor

CC: Rick Perry, Michele Bachmann, Ron Paul

From: Ben Bernanke

Re: "Extraordinary intervention" letter of September 20, 2011

Gentlemen:

Hahahahahahahaha!

When I first glanced at your letter of Sept. 20, 2011, I thought you were making serious recommendations about monetary policy. But then I realized it was an ironic joke. We're a serious bunch here at the Federal Reserve, and we don't enjoy much occasion for jocularity these days. But your letter has provided some much-needed comic relief.

[See how to escape the middle-class squeeze.]

We are particularly amused by your reference to Fed actions that "have likely led to more fluctuations and uncertainty in our already weak economy." We here at the Fed watched in awe this past summer as you and your congressional allies demonstrated your vast power to create "fluctuations and uncertainty," by threatening to default on trillions of dollars' worth of U.S. debt. That triggered the first-ever downgrade of the nation's credit rating. The stock markets tanked. Consumer and business confidence plunged. You guys rock! Fluctuations and uncertainty indeed! So we humbly express our thanks for your insights on how to wreck the economy. (Heh-heh, I'm still chuckling.)

As you requested, I have shared your letter with my fellow members of the Federal Reserve Board of Governors. They, too, got a few giggles out of it. Among other things, we enjoyed your feigned ignorance of the Fed's structure—especially since Congress created the Fed. It's the Federal Open Market Committee that determines monetary policy, not the Board of Governors. The FOMC includes the members of the board, as well as five of the 11 Reserve bank presidents, who rotate in and out of the FOMC for one-year terms. But you knew that! In case your children would like a primer on the Fed, however, we do have a "kids page"on our website that adults are free to "monitor"—you know, to make sure we aren't exposing them to immoral mesages about the virtues of inflation.

Even though you didn't ask, I have taken the liberty of sharing your letter with the additional members of the FOMC. They could use a laugh too. In fact, we opened our most recent FOMC meeting by going around the table, with each member indicating what he or she thought was the funniest part of your letter. A few highlights:

Bill Dudley was amused by your request that we show "quantifiable benefits to the American people" that have come from our actions. "Quantify this!" he hollered. That remark might have been a bit crude, but you know Dudley. The point he was making, I think, is that the Fed would be pleased to develop an econometric model of its effectiveness. Dudley went on to suggest that we develop an indexed methodology that measures the effectiveness of all branches of government and compares them to each other. The effectiveness of the legislative branch, of course, would be measured based on the quantity of words generated, not on the amount of legislation passed.

[See what Bernanke wants Congress to do.]

Elizabeth Duke chortled when she read that "it is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate." "Ya think?" she hollered, as the rest of us nodded in nervous agreement. For the last year or so, we've been desperately hoping that Congress would do something to help the economy, so we can stop experimenting with stuff we don't know that much about. Just between us, we really don't think there's much we can do at this point to make the economy grow or bring back jobs. You summarized our view with artful comic understatement. Well done!

Narayana Kocherlakota could barely contain himself when he read that our policies might prompt "more borrowing by overleveraged consumers." "Okay then!" he blurted out. "Nobody spend anything! Save all your money!" The whole FOMC cracked up at that one, since everybody knows that the result of a credit freeze on an economy driven largely by consumer spending would be: a depression. "Let's relive the 1930s!" Narayana added. Don't worry, he was kidding, just like you. He only meant that poor people without access to lobbyists or federal favors should relive the 1930s.

[See how the debt fiasco damaged the economy.]

Your worries about a weak dollar led Charles Plosser to exclaim, with mock seriousness, "A strong dollar is in America's interest." That drew another round of guffaws, since, like you, we know that this outdated slogan dates to a time when Americans built many of the world's most desirable products, and U.S. firms didn't need help exporting their goods or competing with cheap stuff made overseas. Yeah, we long for those days too, and like you, we hate paying the equivalent of $30 for a decent glass of Bordeaux when we travel to Paris or Davos. (Oh, right--lobbyists pay for all your meals and drinks, wink wink.)

Richard Fisher, who has disagreed recently with some FOMC decisions, had an idea when he read your point about dissension here at the Fed over our own policies. "I know," he said. "Let's all sign a pledge! We'll just do whatever the chairman tells us to do. We'll never disagree about anything, and it will be so much easier than having to think." Several other FOMC members joined in the gag, and a chant briefly erupted: "Pledge Don't Think! Pledge Don't Think!"

We have one suggestion. You wrote that "the American economy is driven by the confidence of consumers and investors and the innovations of its workers." Why not add that a sound economy also depends on the competence of the nation's politicians? We think that assertion would be uproariously funny, since polls show that Americans hold Congress in far lower esteem than the Federal Reserve. The idea that coherent, bipartisan policymaking might help the economy is so fanciful that we think it would be intuitively hilarious.

[See 5 economically illiterate campaign themes.]

There's one last thing I'd like to add personally. Rick Perry, Ron Paul, and Michele Bachmann didn't sign your letter, but they've echoed your sentiments by calling our actions "treasonous," insisting that the Fed should be abolished, and fretting that inflation, which is running at less than 3 percent so far this year, will soon became a runaway problem that rampages across the land. We at the Fed are mostly dull, geeky folks with Ph.D.s who wield nothing more threatening than an occasional spreadsheet. We are frankly flattered by all the attention, and by the suggestion that we are money-printing rebels. There's a new swagger in the halls here at the Fed, as we try to fit into our new role as monetary roughnecks. Fisher even bought cowboy boots. Thanks for helping America notice us.

Yours in Jest,

Ben Bernanke

Twitter: @rickjnewman

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What Bernanke Wants Congress To Do

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It would be nice if he just came out and said what was on his mind. But that's not the way the chairman of the Federal Reserve usually speaks. Still, Ben Bernanke is getting a lot more talkative when it comes to the nation's economic problems.

Part of the Fed's job is to keep inflation in check, which it has done, for the most part. But the Fed is also charged with keeping unemployment low, which may be far beyond its power. Since the politicians in Congress and the White House can't get anything done without brawling, the Fed now seems like the last hope for any new policies to jump-start the flagging recovery. The Fed is running out of options however, as Bernanke himself implicitly acknowledged in his recent Jackson Hole speech. "Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank," he reminded a worldwide audience.

[See 7 ways Obama can gain credibility on jobs.]

The Fed has already done more than any other branch of government to forestall a depression, end a financial panic, and sow the seeds of economic recovery. While not always popular, the Fed's moves have certainly been aggressive. Under Bernanke, the Fed has rescued insurance giant AIG, granted more than $1 trillion in emergency loans to U.S. and European banks, slashed interest rates, and undertaken risky "quantitative easing" programs to help boost stock prices. As the Fed exhausts its arsenal, however, Bernanke has been dropping louder and louder hints about what Congress ought to do to pick up the slack. Here are some of the main suggestions embedded in Bernanke's typically circumspect rhetoric:

Reduce the national debt. Like nearly all economists, Bernanke is unequivocal about this. "U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time," he said in his Jackson Hole speech. Bernanke also seems disgusted by the destructive political brinksmanship during the recent battle over the debt ceiling, which damaged confidence, sent stock markets reeling and ultimately left all the biggest issues unresolved. "The country would be well served by a better process for making fiscal decisions," Bernanke noted drily.

Get entitlements under control. This too is a refrain often heard among economists, since the cost of Medicare and Medicaid in particular is rising at a pace that will bankrupt the U.S. government eventually. "The increasing fiscal burden that will be associated with the aging of the population and the ongoing rise in the costs of health care make prompt and decisive action in this area all the more critical," Bernanke said.

[See how the debt fiasco damaged the economy.]

Formulate a plan now…. In a June speech, Bernanke said that "acting now to put in place a credible plan for reducing future deficits would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence." Congress didn't listen. Instead, the outcome of the summer debt-ceiling battle was a plan to cut a bit of spending now, with more unspecified cuts to be determined later. And the debt deal wrecked consumer and business confidence instead of boosting it, since Republicans demonstrated economic recklessness and Democrats seemed managerially incompetent.

… But phase it in gradually. America's biggest economic problem at the moment isn't the national debt, it's chronic joblessness and a weak economy bordering on a double-dip recession. That's why it's important to enact a credible debt-reduction plan now, but wait a few years before spending cuts or other austerity measures go into effect. In Bernankespeak: "Policymakers could commit to enacting in the near term a clear and specific plan for stabilizing the ratio of debt to GDP within the next few years and then subsequently setting that ratio on a downward path."

Help fix the housing market. Stimulus plans have become unpopular, but since the economy isn't really recovering on its own, the case for renewed government action is growing stronger. One area the government could target is housing, which is a huge drag on the economy that hasn't benefitted as once hoped from bank bailouts and low interest rates. In Jackson Hole, Bernanke singled out housing as a key sector that usually helps drive the economy out of recession, but this time is holding back the recovery instead. And while he thinks housing will bounce back eventually, he argued that "good, proactive housing policies could help speed that process." The Obama administration is supposedly looking at new ways to help distressed homeowners, which could make a homeowner-bailout plan one of the big political battles between the White House and Congress this fall.

[See why there might be a homeowner bailout]

Consider a value-added tax. There's growing consensus that America needs tax reform in order to reduce loopholes for favored groups and special interests and revert to a simplified tax structure—perhaps with lower rates. "To the fullest extent possible," Bernanke said, "our nation's tax and spending policies should increase incentives to work and to save." That's economist code for a value-added tax or VAT, which would basically amount to a national sales tax on most things people buy. Many economists would like to see lower taxes on income—which would raise the return on labor and therefore increase the incentive to work—combined with higher taxes on goods and services, which would make buying stuff more expensive and therefore encourage people to spend less and save more. The simplest way to do that is with a VAT, which most developed nations have. Bernanke hasn't endorsed the idea outright, and many conservatives are deeply opposed because they feel it would simply generate a lot of new revenue for the government to spend. To have any chance, a VAT would probably have to be combined with deep cuts in income and corporate taxes.

Invest in R&D and infrastructure. Bernanke would also like to see tax and spending policies that "encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure." That might require new or enhanced tax breaks for things like hiring or retraining workers, bringing more multinational profits back to the United States and investing in R&D. The Obama administration may also try to develop an "infrastructure bank" that would use government guarantees to back private investment meant to improve the nation's roads, bridges and other byways.

[See 5 economically illiterate campaign themes.]

Abolish the legislative branch. Okay, Bernanke didn't go quite that far, but he dished up some of the most pointed criticism of leading politicians to come out of a Fed chairman's mouth in recent memory. "The negotiations that took place over the summer," he said, "disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses." In other words, Bernanke, like many Americans, found that key policy-making negotiations between the legislative and executive branches failed the nation.

What the Fed chairman would like to see instead: Inviolable goals and targets for reducing the debt, with enforcement mechanisms that guarantee it'll happen. "Of course," he added, "formal budget goals and mechanisms do not replace the need for fiscal policymakers to make the difficult choices that are needed to put the country's fiscal house in order, which means that public understanding of and support for the goals of fiscal policy are crucial." That's a mouthful, so here's a translation: Congress, get a clue.

Twitter: @rickjnewman

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