Bernanke's Out-of-Touch Speech
No Ben to the rescue. The hugely anticipated speech by the Fed chairman proved to be remarkably vanilla, which should have surprised no one. Bernanke reiterated a series of themes that have been well iterated in recent weeks: that growth has stalled but is poised to rebound in the second half, that housing remains a drag on the slow economic recovery, that unemployment is disturbingly and dangerously high, and that better government fiscal policy to address short-term economic weakness and long-term deficits is essential.
The only thing financial markets really cared about was whether there would be a hint of a new round of “quantitative easing,” known affectionately as QE, the last round of which, QE2, somehow appropriated the name of luxury liner. The results of QE2, however, were underwhelming for passengers in steerage, while temporarily making life that much easier for the staterooms. Stocks went up; employment and income did not.
On Friday morning, Bernanke promised no QE3, and given the excess of controversy and the dearth of tangible long-term benefit of the last round, that is a good thing. (The markets seem to have felt the same way, and rallied immediately after.) Instead, he stated blandly that the Fed “will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion.” Ooh, two days instead of one. Hosanna.
The larger issue is that while the Fed may be looked to as the proverbial knight in shining armor, to mix clichés, it has few arrows left in its quiver. Short-term interest rates that the Fed controls are already de facto zero, and Bernanke has promised that they will remain so until at least mid-2013.
The Fed’s policy from last year through the first months of this year was largely in the form of directly buying hundreds of billions of dollars of U.S. Treasuries. The effect was to give financial markets a burst of liquidity, and that adrenaline high made its way into higher stock prices and, to some extent, higher commodity prices, though the price of everything from oil to copper has largely been driven up by demand from China. That may have trickled down into the real economy, but evidently more of it simply bolstered corporate balance sheets and institutional and individual portfolios. That, in turn, may be one reason consumer spending in the U.S. has been stable, showing moderate growth even in a very sluggish first half of 2011. And easier financial conditions and cheap credit do aid economic activity, though clearly not as much as policymakers have hoped.
More disconcerting is the degree to which Bernanke—and it’s safe to say many economists and economic officials—remains firmly committed to an old script that holds that recession and now the subsequent two years of blah fits into clear historical patterns. In his speech Friday morning, Bernanke spoke of how “the housing sector has been a significant driver of recovery from most recessions in the United States since World War I,” and the degree to which its failure to do so now is one reason for still weak growth. He spoke of how recessions historically have led to “pent-up demand, often augmented by the effects of stimulative monetary and fiscal policies, [which] is met through increased production and hiring.” And he charted how that then leads to higher wages, more lending, and more spending in an economic “virtuous circle.”
Sounds wonderful, but the notion that economies are predictable mechanical entities that we just have to figure out has led to some of the worst policies and continues to. Yes, societies around the world have become much better at moderating the worst effects of financial crises, and as bad as our current difficulties may be, they are flesh wounds compared to the trauma of most crises before the mid-20th century. That said, the ingrained belief that today is simply the latest episode of familiar patterns is crippling our ability to function.
There is only one constant in human history: change. Regular, massive, revolutionary change. The retirement of Steve Jobs as CEO reminded us that 10 years ago, Apple was left for dead. Today it is shaping people’s lives throughout the world. Twenty-two years ago, Soviet communism was alive and unwell. A year ago, Hosni Mubarak was a trusted ally. The list goes on ad infinitum.
Yet for economists, the only thing held to be foolish isn’t the glaring observation of change but the fools who claim that things might just be different this time. Economic policy is nowhere more pure than at the Fed and among central bankers, and they continue to play off a 20th-century script that sees inflation looming on the other side of loose money and employment, and economic ebbs and flows as cyclical and similar. Weirdly, the anti-elitist Tea Party has ingested some of that orthodoxy, as have gold bugs; they see the present low rates, slow growth, and high unemployment as a lull on the way to high rates, the collapse of growth, and higher unemployment.
To be fair to Bernanke, there is not much more the Fed can do given its powers. It can continue to provide liquidity, and likely will if things continue to drift. But we don’t have a money problem, and there is no structural issue with liquidity, here or in Europe. The issues are demand for labor, the cost of labor, and a global system that is advantaging technology on the one hand and the emerging world on the other, all the while generating a crisis of growth expectations in the developed world. More money is sloshing around, and more capital is being unleashed by the emerging world, than ever before in history, and more money from the spigots of the Fed will not solve issues that aren’t being solved. Stock markets might be buoyed, and that is actually a good thing, all things being equal, but that’s about it.
So Bernanke shouldn’t be blamed for not doing more; nor should he be held accountable for the current state of affairs. (Note to Rick Perry: the Fed doesn’t print money, and disagreements about monetary policy don’t rise to the level of treason.) But the worldview the Fed chief espouses—of economies as simple mechanisms and economic crises as patterns that recur—is hampering our collective ability to address realities that are proving stubbornly immune to past medicine. What we can admire about China, for instance, is its lack of orthodoxy and the nimbleness of an authoritarian regime dealing with the world as it evolves, rather than imposing patterns on that don’t fit. The American economy today needs that creativity, and Bernanke’s speech Friday is one more reminder that such creativity is little in evidence.