Federal Reserve Chairman Ben Bernanke used his much-anticipated
Friday speech at the Fed's annual end-of-summer conference in
Jackson Hole, Wyo., to
sound almost like the last Keynesian
. As he put it: "Monetary policy cannot achieve by itself what a
broader and more balanced set of economic policies might achieve;
in particular, it cannot neutralize the fiscal and financial risks
that the country faces."
Commentators made much of the fact that Bernanke said that he
considered the economy dangerously soft; that unemployment was far
too high for this stage of a recovery; that housing continued to be
a major drag, as well as state and local budget cuts. Fed chairmen
are famously Delphic. But Bernanke was blunt:
Growth in recent quarters has been tepid, and so, not
surprisingly, we have seen no net improvement in the
unemployment rate since January. Unless the economy begins to
grow more quickly than it has recently, the unemployment rate
is likely to remain far above levels consistent with maximum
employment for some time.
Bernanke reviewed the Fed's non-traditional interventions that
have kept interest rates at historic lows -- the massive purchases
of government and other securities; the efforts to lock in very low
interest rates for longer-term bonds; and vowed that "Taking due
account of the uncertainties and limits of its policy tools, the
Federal Reserve will provide additional policy accommodation as
needed to promote a stronger economic recovery."
Despite his caveats, the financial press
Bernanke's words as meaning that the Fed would undertake even more
heroic measures to drive interest rates even lower. Perhaps the Fed
will, but that was not the import of Bernanke's remarks at all. His
point was that the rest of the government had to do some heavy
"It is critical that fiscal policymakers put in place a
credible plan that sets the federal budget on a sustainable
trajectory in the medium and longer runs. However, policymakers
should take care to avoid a sharp near-term fiscal contraction
that could endanger the recovery."
Translation: we will never get a strong recovery just by relying
on cheap interest rates.
We need a more sensible fiscal policy
A Federal Reserve chairman is not supposed to address such
topics, because taxing and spending are not part of his franchise.
But to the extent that the failure to stimulate the economy has put
unrealistic pressure on the Fed to work miracles, fiscal policy is
necessarily the Fed's business.
What Bernanke hinted at, but couldn't quite say, was this:
While we need to bring deficits down over the long term, for the
next few years we need more stimulus, not less. It isn't just a
matter of avoiding "the fiscal cliff," as Bernanke warned. We need
far more government spending.
The closest Bernanke could come to saying this was by expressing
polite concern about fiscal "headwinds." As he put it:
"Notwithstanding some recent improvement in tax revenues, state and
local governments still face tight budget situations and continue
to cut real spending and employment."
Translation: government should not be cutting back in a deep
recession; it should be making up for the shortfall in private
In the 1930s, when the United States faced a far deeper
depression, we built the Golden Gate Bridge, the San
Francisco-Oakland Bay Bridge, the George Washington Bridge and the
first modern highway systems; we constructed and renovated
thousands of public schools, fire stations and post offices;
planted a billion trees; laid 20,000 miles of water mains;
electrified rural America and undertook countless other public
works projects. And when the early projects were not sufficient to
end the Great Depression, we doubled down.
This time around, President Obama in February 2009 persuaded
Congress to enact a $787 billion stimulus program that his own
advisers considered inadequate, but one that did a lot of good --
for two years. Then nearly all of the stimulus spending petered
out. Of the total, the Congressional Budget Office estimated that
$718 billion was spent by 2011. And by 2011, of course, Republicans
controlled the House so no further stimulus was politically
Today, there is so much public infrastructure in disarray, such
a crying need to move the nation to a sustainable energy path, and
so great a need for the jobs that could be created by large-scale
public investments that more stimulus spending should be a
no-brainer. But this alternative is not even being seriously
debated. Rather, Democratic paths to deficit reduction are jousting
with Republican paths.
So here is Ben Bernanke -- a Republican, first appointed by
George W. Bush, a huge admirer of Milton Friedman -- saying what no
other Republican and too few Democrats are willing to say: The
problem is not the deficit, but the risk that Congress will
overreact to the deficit.
The problem is not that some undeserving soul might get too much
mortgage relief, but that government housing policies are too
feeble and the undertow of a collapsed housing sector is sinking
the recovery. And even with 4 percent mortgages, brought to you
courtesy of the Fed's cheap money policy, the housing crisis isn't
Bernanke doesn't walk on water. He was far too slow to embrace
drastic reform of America's banking system. Still, it is quite a
moment in America's economic debate when one of the most
progressive figures on monetary and fiscal policy is the Chairman
of the Federal Reserve.
Fed Gets Aggressive: Willing To Risk Some