Bernanke: Fed Unprepared To Deal With Economy Falling Off 'Fiscal Cliff'

A trader on the floor of the New York Stock Exchange works on the floor as Fed Chairman Ben Bernanke announces that it will hold its key interest rate near zero on April 25, 2012 in New York City.

Ben Bernanke warned the Federal Reserve would be powerless to keep the economy from disaster if Congress fails to keep the country from falling off what economists call a looming "fiscal cliff."

In a press conference Wednesday to discuss the Fed's latest policy decision, Bernanke warned that a series of tax increases and spending cuts built into current federal law and scheduled to take effect on January 1, 2013, would be a "significant risk to the economy."

The extension of the Bush tax cuts expires at the end of the year, as does a temporary cut in the payroll tax, Reuters noted on Tuesday. The Alternative Minimum Tax also needs adjustment at the end of the year, as always, to avoid a tax increase for many taxpayers. Meanwhile, some $1.2 trillion in spending cuts take effect at the end of the year, a result of the debt-ceiling debacle last summer.

"If no action is taken by fiscal authorities, the size of the fiscal cliff is so large that the Fed would have no ability to offset that effect on the recovery," Bernanke said.

The Fed on Wednesday decided to keep its key overnight interest rate near zero and pledged anew to keep rates "exceptionally low" until late 2014.

In a question-and-answer session with reporters, Bernanke said the most frustrating aspect of the economy was that it has been "a long slog," with the unemployment rate still above 8 percent three years after the recession technically ended, by at least one measure.

In that light, some academics, including Princeton economist and New York Times columnist Paul Krugman, have accused Bernanke of not being aggressive enough in helping the economy. In a new New York Times Magazine story, Krugman says Fed Chairman Bernanke is ignoring his own advice, given to Japanese policy makers during their own long slog to economic stagnation.

In the press conference, Bernanke strongly disagreed with Krugman's premise, pointing to super-low rates and a series of unusual Fed bond-buying programs as evidence he has aggressively moved to help the economy. Japan was in much worse economic shape than the U.S., he argued, and current Fed policy is just about right under the circumstances. Doing more, he added, might not be worth the risks.

Meanwhile, he also fended off criticism that the Fed is doing too much, most recently from former FDIC chief Sheila Bair, who wrote in Fortune that the Fed needed to "declare victory" and raise interest rates, lest it blow up a bubble in the bond market.

Bernanke grinned miserably when asked about Bair's suggestion and said "I think it's a little premature to declare victory."

In fact, he was downbeat enough about the economy to leave the door open for still more action in the future. The stock market, which is addicted to Fed stimulus and craves more, rallied on his words.

Comments

[Bunny007]

10:57 AM on 04/28/2012

Same as it ever was---

Take care of the banking cartel that OWNS the Fed and stick Americans with the bill....

When will this crime spree stop??

[muck-raker]

05:55 AM on 04/27/2012

petition calls for the abolishment, by Congress of The Federal Reserve To return all the rights and profits, from creation of money to the rightful heirs, the citizens and U.S. Government. It is outrageous that private banks and FED can create our money and collect interest on it. If we must pay interest on monies created and loaned, let it be the United States of America that receives it, not some private interest.

We have lost our freedom to private banks that create money out of thin air and enslave common man to a life of debt. If we are to be indebted let it be to our country and not bankers.

"The States should be applied to, to transfer right of issuing circulating paper to Congress exclusively, in perpetuum." --Thomas Jefferson

"[The] Bank of the US.. is one of most deadly hostility existing, against principles and form of our Constitution... An institution like this, acting by command and in phalanx, may, in critical moment, upset government. I deem no government safe which is under vassalage of any self-constituted authorities, or any other authority than that of the nation, or its regular functionaries. What an obstruction could not this bank of the United States, with all its branch banks, be in time of war! It might dictate to us the peace we should accept, or withdraw its aids. Ought we then to give further growth to an institution so powerful, so hostile?" --Thomas Jefferson

[idealist2]

03:44 PM on 04/29/2012

That comment makes Fruit Cakes look intelligent.

[WorkhelpWorkhelp]

04:03 AM on 04/27/2012

Please, everyone, watch this fact based award winning documentary. Then send it to everyone you want to be as informed as you. It's the best history on exactly how and when they stole our ability to use money fairly.

http://www.youtube.com/watch?v=swkq2E8mswI&list=WL40442CD8FFF5BDEC&feature=mh_lolz

[WorkhelpWorkhelp]

03:59 AM on 04/27/2012

Bernake dude,.....watch this award winning documentary to understand that WE fully understand you're full of it.

http://www.youtube.com/watch?v=swkq2E8mswI&list=WL40442CD8FFF5BDEC&feature=mh_lolz

[Carolab]

03:30 AM on 04/27/2012

Invest in Canada or Mexico.

[Markrsm]

12:52 AM on 04/27/2012

Dear Friends,

The only solution is to use our natural resources, and put people back to work, even the ones that do not want to go back to work.

We have to cut 1T out of the federal budget and get rid of all Mr Obama tax cuts, all of them.

Then we can have the same economy we had under Mr Clinton, why are people so stupid, the economy has been a bad all thru Mr Bush, and Mr Obama extend all of Mr Bush policies, and even creates some new ones that are worst.

[Veri]

01:25 AM on 04/27/2012

In 1981, Paul Volcker, Ronald Reagan, and Finance made a deal. The deal was that for the next 30 years, the right people would be allowed to become wealthier without significant interference by the government. That deal ended in 2010.

And now, those who became wealthier than at any time in human history want to keep, and go on becoming wealthier, what they have been allowed to horde.

The deal was made to shore up Social Security. At the end of those thirty years, those who were allowed to increase their wealth would than have had to help out those who were less fortunate.

That deal is broken. We owe the super-wealthy no allegiance.

[Kye154]

11:54 PM on 04/26/2012

Bernanke must have gotten awfully uncomfortable to breakdown and respond to Krugman's remarks. Sometimes the truth hurts, and Bernanke knows he hasn't done enough,, much less have a game plan to prevent the next crisis from happening. Rather, he is more concerned with the way he looks in front of the camera, (primps with his beard allot to look "sophisticated and capitalistic", like the barons of the Gilded Age), than he is running the Federal Reserve like he should Also, he is very much interested in getting a cushy job over at Goldman Sachs, once his appointment expires. Can't have any controversy to hamper his move, now can we Mr. Bernanke? .

[Carolab]

03:32 AM on 04/27/2012

He is a soulless opportunist, not a true ivory tower thinker.

[Genders]

10:46 PM on 04/26/2012

The FED caused the crash. The gave the banksters who crashed the economy a 26T$ slush fund they use to gamble and speculate driving prices up all over the world.

Raising income taxes/gains is good for the economy, not bad.

Raise income/gains to 50% over a million and 90% over a billion.

Outlaw SWAPS and all other direvatives, restore Stegal,

phase out fractional reserve

while phasing in greenbacks to pay for the Republics and govs expenses.

Otherwise the banksters win.

They actually had 144% of our economy. The FED made of the difference.

And they have gotten large.

SWAPS now have larger overhangs in the QUADRILLION dollar range.

The slightest downturn will be leveraged to infinity and crash the economy.

[MilesToGo]

10:36 PM on 04/26/2012

While Krugman's economic policy proposals are generally correct, such Keynesian tactics meant to benefit the broad population, don't align with Fed assumptions & interests which focus on what wealthy elites and bankers imagine are necessary. Bernanke's perspective changed once he became involved with the Fed, before that he too was an "enlightened" academic.

[Solvend]

08:16 AM on 04/27/2012

Krugman is right about the Fed doing even more though. Increase target inflation to 3-4% and that should help unemployment come down some more. Lets remember though, employment is called a "sticky" stat because it takes time for changes to come to fruition If Congress had the interest of the citizens in mind, the recovery would have taken place on Main Street as well as Wall Street.

[JackAS12]

09:40 PM on 04/26/2012

Maybe there are no solutions. We could cap Social Security and Medicaire at age 85. After that you receive a 10% reduction each year you live beyond 85!

[monoloco]

08:19 PM on 04/26/2012

Come on Ben, tell us one more time why the solution to excessive debt is more excessive debt.

[WorkhelpWorkhelp]

03:59 AM on 04/27/2012

Sounds like you may have seen this already? If not you'll love it.

http://www.youtube.com/watch?v=swkq2E8mswI&list=WL40442CD8FFF5BDEC&feature=mh_lolz

[Peter007]

04:29 PM on 04/26/2012

You can't spend more wealth than you create.
The accounting gimmicks and deceitful balance sheets fool most of the people, most of the time, but arithmetic is a science you can't avoid.

Politicians get elected by promising people something for nothing.

That's why democracy is doomed for failure.

[monoloco]

08:30 PM on 04/26/2012

Congress is too co-opted to cut spending and too spineless to raise taxes, only leaving the option to inflate. Inflation is the cruelest tax because the ones that it affects most are the ones who can least afford it, which also makes it the favorite tax of the 1%.

[MilesToGo]

10:05 PM on 04/26/2012

The one-percenters hate inflation and do all they can to have it's possibility avoided, which is why Keynesian strategies aren't being used now. We were warned repeatedly since 2008 that Fed policy and more deficit spending would provoke hyper-inflation...which it has not.

[Genders]

10:52 PM on 04/26/2012

It's low t5axes, and deregulation that crashed the economy, not social programs.

[DismayedRepub]

02:31 PM on 04/26/2012

These guys still think the recession ended three years ago? We’re doomed.

[MilesToGo]

10:08 PM on 04/26/2012

They know it didn't end...they just change the definition of recession and the factors and metrics that measure such. It's all part of the psychology to pump sunshine and optimism into a failing economy. The efficacy of such strategy is faltering, which they also know.

[Mychmclthoughts]

01:46 PM on 04/26/2012

I have no facts to base my first impression of these two pictures but they both look like nerdowells to me and I don't know why.

[WorkhelpWorkhelp]

04:01 AM on 04/27/2012

It's good to recognize having no information to base qualified opinions. Work on that, ok?

[ponderingtoo]

12:50 PM on 04/26/2012

The problem Bernanke is facing is that, unlike straight economic analysis, he has to apply it in the real world where there are international organizations (IMF) which impose obligations on the US govt, international organizations that are quasi-central banks (ECB) with which the Fed has counter-party risk, global financial obligations that have been sliced and diced so much that a home mortgage originated in Little Rock may have been packaged with some from Vienna and sold to someone in Singapore, and fiscal policies all over the map in each of those countries.

Shifts on charts in a classroom are one thing. Trying to implement monetary policy in a highly international environment where, as the US central bank, you're trying to do things in conjunction with others that may not have the same ideas and goals you do is different. When the foreign leaders in charge of the various govt. policies are changing with the wind, either through resignation or voter removal, the job becomes that much more difficult. Sort of like trying to run a relay race when your teammates are quitting, running backwards, or sitting in the grass on the side of the track.

[Liteworkr]

12:53 PM on 04/26/2012

So in other words, we don't need a ptivate bank trying to control the economy and credit.

[ponderingtoo]

12:58 PM on 04/26/2012

I agree a private bank should not be in charge of monetary policy. But someone has to be unless you're going to eliminate money and go back to bartering.

[Genders]

10:53 PM on 04/26/2012

It's congresses job.