There are two ways to read the much-anticipated words Federal Reserve Chairman Ben Bernanke issued this morning in Jackson Hole, Wy., and both of them are bad.
In the terse and inscrutable language of Fed-speak, the Fed chairman said that he has tools left in his tool kit that could be employed to spur the economy, but he isn't going to use them now. In plainest English, that's either not true, or it's troubling in the extreme.
If the Fed really could be taking measures to add vigor to a dismal economy, than what are we waiting for? Joblessness remains at epidemic proportions, housing prices are falling, and homeowners keep sinking into delinquency. Manufacturing seems to be retreating anew, and Europe and Japan are both in distress, snuffing out hopes that exports can lead us out of the ditch. The only impressive growth is found in the production of dreary economic forecasts and worries that we are headed for a double-dip recession.
Indeed, Great Recession no longer seems an adequate term to describe what has happened to our economy in recent years, with nearly half of unemployed people out of work for six months and longer and roughly one in three homeowners owing the bank more than his or her house is worth: Depression has reentered the contemporary lexicon. In everyday conversation, ordinary people now speak about the demise of the middle class as a done deal.
These are not times to be thinking about conserving what is left in the arsenal if you possess authority that allows you to take a shot at changing the situation -- particularly not if you are Ben Bernanke, whose impressive academic career has centered on the lessons of the Great Depression. Then, as now, wrong-headed politicians in Washington embraced austerity as the cure for what ailed the economy, turning a difficult situation into a full-blown disaster.
Among the academic set, debate now centers over what exactly Bernanke's Fed could do if it felt inclined to reach for the strongest medicine. Friday's speech disappointed those hoping to hear that we would get another round of so-called quantitative easing, in which the Fed buys up assets -- government savings bonds and other forms of investment -- to inject money into the economy and spur activity. Some economists say we ought to go still further, with the Fed publicly embracing inflation, pouring as much money into the economy as needed to make it happen.
Inflation is not to be welcomed, as anyone old enough to remember the 1970s can attest, but it beats the alternative now taking shape: Years of stagnation and retrenchment, with no engine for economic growth. This pretty well describes what happened in Japan following the collapse of real estate prices in the 1990s. There, deflation took control -- falling prices eliminated incentive for companies to invest and hire.
As Paul Krugman points out Friday, as recently as 2000, Bernanke was prescribing inflation and potent quantitative easing for Japan.
Does Bernanke no longer believe in that regimen? Is there in fact nothing left for the Fed to do to try to spur the sputtering economy?
The chairman steered right around that question in his speech, implicitly dismissing such considerations as moot. Never mind what he might or might not be able to do, he said, because things are getting better. If we just hang on, stay the course, then everything will get fixed up of its own accord -- a hopeful message that is tough to square with the lives of people who are not currently enjoying the crisp mountain air in Jackson Hole.
"Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years," Bernanke said. "It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals."
We have already learned the dangers of accepting false assurances from Bernanke. Back in the spring of 2007, when troubles began emerging in a lesser-understood part of the financial system known as subprime mortgage lending, Bernanke told the world not to worry.
"The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained," he told Congress that March. "In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."
That quote is famous now, included on any Greatest Hits album of unfortunate utterances by people who should have known better, and who could have taken action to avert catastrophe. But the part that seems just as troubling now is the seemingly ordinary sentence that came after: "We will continue to monitor this situation closely."
Bernanke said pretty much the same thing Friday about the debt crisis in Europe and the vulnerability of spillovers to the American banking system, about the sluggish pace of growth in the United States. Yet the monitoring system of this Fed chairman failed miserably during the tail end of the housing bubble, to the detriment of millions of would-be workers and savers and taxpayers. There is ample reason to fear that it is failing again, for the simple reason that Bernanke believes in the Confidence Fairy. He would rather lay out a nice scenario and bet that it will happen than scare the markets with dire talk and risk panic.
Friday's speech was -- as is typical of Fed pronouncements -- open to multiple interpretations. The trouble this time is that most of the available interpretations are awful. You can either buy into the happy talk: that contrary to the metrics at work in most of the economy -- affordability of gasoline, ability to pay mortgage, existence of paycheck -- prosperity is indeed right around the corner. Or you can engage in the parlor game of debating why, given the perilous state of the economy, the Fed Chairman opted to hold off on further intervention: either because his tool kit is empty, or because he lacks the conviction to use what he's got.
Krugman, who has been right about an awful lot in recent years, chose the second option.
Bernanke now confronts dissenters in the Fed itself who are fearful of undermining the value of the dollar, which would happen if they printed bills up by the trillion to inject into a flagging economy. Bernanke understands that further Fed intervention will inflame the lunatic fringe of the Republican party, which only a few weeks ago was threatening to provoke a sovereign default if it did not get its way on spending cuts to shrink the government -- the source of all evil, according to this perverse ideology.
Bernanke underscored his concerns about this dynamic with a couple of sentences in Friday's speech that stuck out for their unusual directness in the form of political judgement: "The country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well."
It seems fair to assume that Bernanke does feel boxed in to a degree. If he uses the power of monetary policy to try to stimulate the economy, he stirs up the hornet's nest of extreme anti-government opposition that now rules the Republican party, and thereby makes it even harder for Congress to stimulate it by other means. He makes it easier for Republicans to oppose extending unemployment benefits and finance infrastructure projects. He emboldens the dismantling of government to cater to those enraged at what they see as Fed overreach.
Plausible, but I don't think that's the whole explanation for why Bernanke is standing pat and telling us not to worry. Bernanke was plenty smart enough to have understood that once people with lousy credit began to fail to make their mortgage payments in 2007, their defaults posed risks for the broader financial system, with the ripples reaching everywhere that home loans had been distributed -- to Wall Street and around the world. But he offered soothing words instead, presumably in the hopes those words would instill confidence in the markets, and that confidence would become its own reality, preempting panic.
These days, anxiety runs high again -- high enough that every new development and pronouncement can be fit into a narrative of crisis, for those so inclined. Had the Fed Chairman laid out a scenario for fresh quantitative easing Friday, the markets would surely have rallied on the news that help is on the way. Yet markets would also have been handed the story that Bernanke is worried enough about the economy to intervene: By addressing the fears of another recession, Bernanke also would have affirmed them.
Instead, Bernanke essentially tried to make us feel better by witholding treatment and telling us we don't really need it.
It's a dangerous course, and includes a litany of dangers in multiple directions. We all better hope that hollow reassurance as curative plays better this time than it did four years ago.
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