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Bernanke's Dangerous Game
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This week, the Fed chairman unnecessarily raised fears with public statements about future deficits—but the real risk is that he’ll back up his anti-spending ideology with actions.
Federal Reserve Chairman Ben Bernanke decided to weigh in this week about his fear of government spending and future budget deficits. But he speaks more with ideology than practical sense about an area that is really not his business—what Congress and the president decide the nation needs, including public investment. He also has the option to talk privately to these men and women. He chose to make a public statement and made headlines in the financial press.
America is in quite a hole when the loss of one third of a million jobs is considered good news. A shift in Fed policy could be very damaging.
Interest rates are now going up—actually a reassuring sign of return to normality and the end of deflationary fears. But Bernanke has decided to raise fears on the matter rather than putting it in needed perspective. Of greater concern, he may be signaling a near-term change in the Fed’s policy—not necessarily toward explicit tightening, but toward less loosening. Is he trying to appease the bond traders, as Greenspan had long done?
If so, the economy will pay the price. This recovery is simply not in the bag, and any anticipation of a less-accommodating central bank could tip the fragile system toward further rapid decline. At best, remember, the economy is declining less-fast right now, not rising, and jobs are still being lost in huge numbers. The unemployment rate stands at 9.4 percent.
Bernanke did best when he unloaded his past ideological baggage and attacked the credit crisis doggedly and without fear. He even publicly supported the Obama stimulus. In doing this, he abandoned what was his earlier bias against Keynesian stimulus. Monetary policy was the only important tool, he once believed. Is he now merely trying to calm the markets, showing them he’s still the old inflation fighter he was—which means cutting the inflationary dragon off at the head? Is he fending off some of his fellow governors, who have always worried inflation is just around the corner?
Keep in mind, however, how imperfect Bernanke’s prognostications and forecasts have been in recent years. He was late to see the biggest credit crisis of our time and did not begin to mobilize monetary policy until August 2007. He was the man who told us, only a few months earlier in May 2007, “The effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
He called for no serious regulatory tightening at the time, but said the Fed will take a closer look at its options. To place this in context, only a month before—in April—a Bear Stearns executive, now indicted for criminal fraud, wrote an internal memo about how “ugly” the subprime market already was.
He is also the man who told us, as late as 2006, that “the great moderation” was upon us—a less-volatile, more-certain economic environment made possible because the Fed under Alan Greenspan had adopted persistent anti-inflationary policies. Economic shocks were also likely to be less severe and distorting. All the while, speculation in housing was reaching patently absurd and dangerous proportions. Throughout this period of “great moderation,” there were also major financial disruptions in Mexico, Asia, South America, Russia, and indeed on Wall Street, when in 1998 the giant, highly leveraged hedge fund, Long-Term Capital Management, failed. Quite a moderation. Then came the monster economic shock from which we are now reeling.
Finally, Bernanke was one of the most influential advocates of a monetary policy that principally targeted inflation—and little, even nothing else, not even speculative financial bubbles. He had only modest concern about regulatory vigilance. Financial innovation, such as mortgage securitization, was on balance beneficial and excesses were likely to be self-regulated. Markets are, after all, in this view, great self-regulatory animals, even financial markets. Greenspan was the leading advocate of this ideological assumption, for which he has recently and ruefully apologized.
All this was justifiably forgiven when Bernanke turned his attention to the real world with vigor a year and a half ago. Now as a green shoot or two slowly rise from the muck, he is telling us that we have to worry about government spending in the future. But rising levels of debt are the price we knowingly decided to pay to avoid depression. There is no free ride. We chose the lesser evil—the far lesser evil. And there is a good chance we will be able to absorb that debt without overly damaging costs—if the Fed does not get too paranoid about inflation and government spending and doesn’t let the bond traders browbeat them into momentary irrationality.
Right now, Bernanke is making an ideological call, his old instincts rising. What are those instincts? Keep government spending down, the root of most economic evil, because it will lead to inflation, unless Bernanke’s Fed, make no mistake about it, will check it with tight policies. And also be careful about raising taxes to reduce the deficit because higher tax rates will supposedly undermine business incentives. So far, we only see glimmers of this ideological turn; but this is what I think Bernanke is signaling. Is his anti-government ideology about to emerge in bigger, bolder ways? Will he also tell us tax cuts are good, tax increases bad? Will he urge Obama to jettison public investment for lower deficits? Is it any of his business?
Odds are now a lot higher that the Fed will soften its recent policy loosening. Anticipated steps to buy up more Treasury securities may be postponed or reduced in size. There may even, sooner than later, be talk about a rise in the federal funds rate, the key target rate for Fed policy. Of course, it is premature to anticipate a serious Fed turn yet, but the recent better-than-expected jobs report could quickly change the environment.
The problem is that the obstacles to future economic growth remain high. Consumers will continue to save their money and not spend. Defaults have not been stanched as yet. The outlook for toxic assets is improving, but far from good. Moreover, today’s rising interest rates may quickly dampen prospects for recovery. Mortgage rates are already well up. And finally, even though the above-mentioned jobs report was better than expected, with an estimated 345,000 jobs lost, America is in quite a hole when the loss of one third of a million jobs is considered good news. A shift in Fed policy, even if mild, could be very damaging.
Sadly, the fearmongers are out in force. Forgetting how bad the crisis is, they will say debt levels are outrageous and, as rates rise, they will slow growth. What is deliberately forgotten, or simply misunderstood, is that without spending, America would have fallen into a far bigger hole—with much higher levels of unemployment, bankruptcies, and lost investment. The rate of growth may be slower in future years due to higher interest rates, but we will start from a much higher level. Is that so hard to understand?
One other probability, given Bernanke’s remarks, is that the bond traders will regain their influence. They are very sensitive to expectations about inflation and, what is important to realize, they have very often been wrong in the past. Yet they had remarkable influence over Greenspan, who I believe regarded the level of long-term interest rates set by these traders as a key signal of what policy he should adopt. If they rose, he would tighten, and vice versa. A better policy would have been to ignore them if evidence is strong that inflation was unlikely to rise.
In fact, there is no sign that inflation is returning. But there will be many who will argue there is. They were arguing late into the summer of 2008 that America had better worry about inflation. And Bernanke may have hesitated to loosen policy sooner because of that very fear. Let us hope he clings to a realistic view.
Jeff Madrick is a contributor to The New York Review of Books and a former economics columnist for The New York Times. He is editor of Challenge magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
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Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.
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Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
We will never survive as a country as a "service" based economy.
We need to manufacture the things that are designed and created in the U.S.
Some of the companies who received bail out money,
were the very same ones who outsourced jobs at the expense of
the very same people who bailed them out . . . The American Worker.
It would have served those companies right if we had let them fail.
Is this country building another bubble that is going to burst
all over again.
If we don't pay attention to history, in this case recent, are we
doomed to repeat?
"You have to spend money to make money" philosophy does NOT work
. . . when you DON'T have the money to begin with.
We are printing money as if we're playing the board game "MONOPOLY."
It all sounds so insane.
To all the financial "geniuses," where was your common sense?
A few of us "regular folk" saw the housing crisis coming a few years ago, and
do you know why?
We figured it out, not with crunching numbers, or analyzing inventory,
but with good old fashion COMMON SENSE.
The huge escalating prices of homes was so unrealistic, and
unsustainable.
Does this country have common sense anymore?
It wasn't just the escalating prices... when you give someone a loan for a half a million dollars and don't find out how much they actually make, you are asking for trouble.
You bring up some good points. But we as a nation we not survive on the "old" economy. We have to create a new one. The old jobs are gone. They are not coming back. You can cry about it. But my grandfather used to say, "You can @#$% in one hand and wish in the other and see which one get's filled first." ;)
The economy has to move into the 21st century. That means away from industries that are dying. Everyone talks about "green energy" as if it's a fantasy... it isn't. It is just new. It is like a newborn. It hasn't learned to walk yet. But it will. Most of the jobs will be found in industries that haven't been invented yet. That is what makes America great. That is her strength...
"We will never survive as a country as a "service" based economy.
We need to manufacture the things that are designed and created in the U.S."
Yeah, because GM did such a great job with that.
Other countries will trade manufactured products for our services. Until they stop doing so, we don't don't have to manufacture more stuff. If somehow international trade totally broke down, we would need to remember how to make stuff. So, a base level of industry should be maintained.
It's not helping that our government subsidizes college education to produce more lawyers, marketers, and professors, when we really need more engineers, doctors, and skilled workers. The resources devoted to soft sciences are crowding out real science. And college education is crowding out career specialization.
Education, cars, housing, banks... the gov't should just butt out! It tries to control things rather than support things. The safety net turned into puppet strings a long time ago. It's about time We, the People cut the strings!
Obama has created 2 trillion dollars in debt in just 100 days. Obama's deficit for 2009 is FIVE TIMES LARGER then the largest Bush deficit. Of course Bernake is worried....when China recently balked at lending Obama the money for his huge deficits, the US simply turned on the printing presses and bought its own debt. Obama's program of loading up future generations with debt and creating hyperinflation should worry everyone.
Sure, we have evolved from
an agricultural, to industrial, and now
technological based economy.
Unfortunately, many tech jobs are
outsourced, and YES there are many
qualified Americans who can do
I.T. work.
Manufacturing is an industry that has
always existed and will never die.
We seem to be one of the few countries
that does not take pride in actually
making things anymore.
Sure, American products are conceptualized,
and designed in the U.S., but manufactured
overseas.
Foreigners often ask,
"What ever happened to made in the U.S.A.?
It used to symbolize quality.
It is interesting that the growing economies
of the world, China, India, Brazil, etc., are very
nationalistic, very proud about what they make.
We on the other hand only seem to care
if the stock is up, and we know what the
stock market looks like now.
Do we really want to depend on
other countries for our food, or our children's toys,
toxic toys from China, or toxic
dry wall that is making Americans sick,
or poisoned baby food?
Products once made in the U.S.A. were
scrutinized and regulated for toxicity, and
quality, etc., and now since most products
are made overseas regulation seems to be
overlooked . . . on purpose ?
Hey....
I'm only a 'simple' single mother!!! I do not have a PhD in finance or business, nor do I earn obscene sums of money on Wall Street.
But let me try to understand what Bernanke and Geithner have been doing over the past few weeks and months:
So you are a person/institution with HUGE debt, on the verge of bankruptcy!! So I (the person who FOR YEARS has been wisely earning and saving and not running up HUGE debts on my many credit cards and purchasing a house within my means and slowly paying off my mortgage and paying my taxes and paying monthly bills to raise my family with 'family values') am required to give you lots of my GOOD money to (supposedly) cover your BAD debts!!! But since no one is really keeping an eye on YOU, you take MY GOOD money and pay yourself a HUGE bonus (even though you ran yourself into virtual bankruptcy). So instead of paying off your HUGE DEBTS, I imagine you take off for the Bahamas where you stash MY GOOD MONEY in an account in YOUR name, retire and live off my hard work!!!!
Where does this leave ME???!!! I (my children and grandchildren) are then stuck with YOUR bad debts and are required to pay them DOUBLE, once: giving YOU the money and twice: paying off your BAD DEBT that went unpaid the first time!!! Doesn't this sound like what is going on ladies and gentlemen of the jury (THE AMERICAN PEOPLE)?????!!!!
Let's just admit that America is BANKRUPT NOW!!!!! I'm FED UP with hearing about all of this GOOD money being handed on a silver platter to the very (CROOKS) bankers and wheeler-dealers of Wall Street who have gotten us into this MESS!!!!
But of course, what do I understand......I didn't go to Harvard Business School.......
tulipano, you understand the "truth" when you feel it, and a Harvard degree would not help you to understand it any better. Getting hosed is getting hosed!
But don't forget about the price of gasoline's impact on that hose job!
That about sums it up. The money printing and fed borrowing is a whole other matter which requires degrees to understand because it defies common sense!
It does and it doesn't. The money supply is not finite. It varies on the amount of economic activity within a certain economic zone. As an economy grows, more wealth is created. (more money)
Every country has a credit limit. Our debt is (relatively.... cover your mouth this might hurt) low in comparison to our GDP versus many other first world nations.
http://www.creditloan.com/blog/americans-debt-to-income-ratio-as-compare d-with-other-countries/
The reason we are propping up these banks is because they are as vital as the electric company. If they fail... it's lights out.
Tulipano,
You couldn't be more correct. THIS SUCKS! What these people did was criminal. They should be in JAIL!
Thank you for that! Am soooo sick and tired of hearing that ANY American regular non bank exec person had anything to do with this crisis? Apparently the only thing they have is a piece of paper from Haaaarvard..
It seems bankers and their ilk are the only persons on earth that don't have to actually know anything about their jobs, how to execute them or anything whatsoever about their industry. They get to play monopoly with our money, but guess what? They don't go to jail and do get to collect 200 dollars or in their cases 19mill ea bonus money.
Mr. Bernanke is merely stating an obious fact of economics. Not to spend more than you actually have. It will come back to haunt you in the future. Did we learn nothing from this economic crisis?
WWII got us out of the depression... in extreme economic downturns extreme measures must be taken. History has taught us that much.
GM couldn't get it's act together any more than Fannie Mae and Freddie Mac could and neither of the three will be weaned from the public teat. Wall St. was allowed to enginneer the biggest scam ever. And they're being allowed to return to status quo ante meltdown. It's the big AIGS sleezout. The US will pay the price in a finance system that's sub prime, big time. And subpar economic performace as far as they eye can see. Welcome to the Third World! George Patton
If rates go up our debt interest goes up as well, are we playing to the market or playing to the gov't? Bernanke is damned either way.
I may be an old conservative, but my understanding is that a "recession" or a "depression" is caused by an excess of goods/services available in relation to the limited currency in circulation. Prices go down. The limited currency available can buy a lot. But usually the people with that currency ain't you or me. And that can lead to riots and anger.
Hence, the government intervenes by massive investment in jobs, job creation and training. In theory this "creates" currency to purchase the excess goods/services. Conversely, I understand "inflation" as excess currency in circulation pursuing a limited supply of goods/services. Result: prices rise. Problem: those who are thrifty and save currency see its buying power weaken and die. Same goes for their retirement currency...
The only ones who seems to make out like bandits are those who disburse the commodity _currency_ for a "modest fee" or those who trade in it.
If the government prints currency today, I can assure you that tomorrow we will have inflation. Can this "currency-creator" produce foodstuff with the _same ease_? Potable water? Clean air? Oil? Fertile soil? No amount of wishful thinking or economic "theorizing" (ha!) will change that.
These attempts to freeze us into present monetarist policy will come to nought unless we get subsidies to become like the Amish. Now that's a thought. Unfortunately, such a self-sufficient system spells death to Wall Street.
Inflation can be (everything is relative) more easily controlled. There are no signs of inflationary pressures as of yet. I would guess this is largely due to the fact that the credit markets are still so sluggish. If lending picks up, the Fed will no doubt reduce the money supply to compensate. In fact we are in more danger in deflation. Deflation is far more serious as there are no government fiscal tools that can affect it's ocurrence.
"And also be careful about raising taxes to reduce the deficit because higher tax rates will supposedly undermine business incentives. So far, we only see glimmers of this ideological turn; but this is what I think Bernanke is signaling. Is his anti-government ideology about to emerge in bigger, bolder ways? Will he also tell us tax cuts are good, tax increases bad? Will he urge Obama to jettison public investment for lower deficits? Is it any of his business?"
wow talk about fear mongering. no, it is not his business, and that is the point. half of his business, as president of the Fed, is to keep inflation rates low, ideally under 2% annually. the fed is supposed to be independent of the federal government, whose goal is to get re-elected. Bernanke is doing what he thinks he needs to do to limit inflation, even though it might be in contrast to barack's statist intentions. he is not a right-wing-lunatic
Bernanke is right. Interest on ten year treasuries is going up, and the Chinese laughed at Geithner when he swore allegiance to fiscal responsibility. Higher interest rates and a fear of a falling dollar are the biggest threat to recovery
For those defending Bernanke, let's keep things in perspective. This is the same guy who actively sold all the bank and financial industry bail-outs, collectively well beyond a trillion dollars and far larger than the entire stimulus plan and the auto industry bail-out combined. He actually said the economy would collapse unless we taxpayers gave them all this money and took on the debt.
It is a joke to suggest he is anti-debt or fiscally conservative. He's just anti spending when the benefit isn't accruing directly to his Wall Street buddies. And he's a GOP appointee with an agenda.
The fact remains that a vast majority of our debt was created by GOP Presidents and Congressional leaders over the last three decades. It gets really old to have the same people who supported and voted for those leaders suddenly get worked up about debt. Some of us were complaining about the cavalier attitude toward increasing debt during the debt-and-spend administrations of Reagan and Bush 1 and 2. Where were all you fiscal conservatives then?
So to add it up, apparently a fiscal conservative is someone who is okay with racking up many trillions of debt, often during bull market economies, then spending a couple trillion on bailing out Wall Street millionaires, but spend half-a-trillion (not counting the tax cuts which it is pretty hypocritical for the conservatives to count as more spending at the same time they were suggesting similar total tax cuts but directly toward the wealthy and business and not counting them as spending) and suddenly you're irresponsible and causing financial Armageddon. I don't buy it.
Will Bernake choke off the recovery? What recovery?
The latest employment numbers show there is no recovery:
http://michaelscomments.wordpress.com/2009/06/05/the-may-unemployment-nu mbers-are-here-and-worse-than-predicted/
This is nothing but a complete train wreck. I think the best Bernanke can do is to try to steer the train to a safe crash point. He's actually doing that well. If there is anything to be gained in a train wreck it is to protect the people as best as possible and to try to come to some kind of controlled crash landing. As much as I hate the Fascism of the whole experience, it may be the best Utilitarian end.
well, the Fed has helped push the stock market to the current insane level setting us up for the next fall. I dont think Bernanke is doing all that well.
Thank you.
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