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 generally interpreted 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 lifting, too.
"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 purchasing power.
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 possible.
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 solving itself.
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.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.
Anjali Kamat: Homeownership: An American Fantasy
Pet peeve of mine, but WHY have you not mentioned the TVA and the FACT that without it, there would have been NO Manhattan project?
How anyone can cling to supply-side conservative fantasies in economics when they have failed every time implemented, and were discredited almost a century ago is proof of just how corrupt, and morally bankrupt the wealth holders pushing these policies are. Despite my confrontational nature on today's political divide, I've never liked the language of class war. However, it is pretty hard to ignore the evidence that the wealthy of today are no longer patriotic members of ANY nation. They see themselves as a power unto themselves. Completely globalized, with allegiance only to themselves, with a weak loyalty to those like them as a breakwater against attack from the rest of us.
Net of State and local cutbacks, the Obama stimulus was zero.
As for government "debt"... It doesn't exist. I'm not saying the government has no obligations, I'm saying the term "debt" doesn't apply as it does to a family's debt. Where are the families who can mint the means for repaying such a debt? Where is a family who can (legally) mint a few trillion-dollar coins tomorrow and pay the entire thing off.
"But that would be inflationary!"... Except, according to its recent audit, the Fed issued $16 - $29 trillion to bail out the financial sector (you know, the one that crashed the economy with its frauds) in 2007. That was five years ago. Where's the inflation.
Economist Steve Keen suggests giving every household $50K to pay off debt first. That would be cheaper than the financial sector bailout, and would re-start the demand needed by the economy. Where would the Fed get the money? The same place it always does. The same place the Bureau of Weights and Measures gets the inches.
Taxes do not fund government. Debt of sovereign, fiat currency is never a problem (unless political opera makes it so). There is no reason the government can't employ the unemployed.
Facts about the Federal Reserve.
The Federal Reserve is a privately owned for profit corporation.
The Federal Reserve has no reserves.
The name was created prior to the Federal Reserve Act being passed in 1913. This was done to make Americans believe the U.S. banking system operated in the public interest. The truth is the Federal Reserve is a private bank owned by private shareholders, and runs purely for private profits, and thereby creating massive debt to the American people.
This privately held organization pays no taxes on the trillions of dollars it makes.
No recess had been called, most senators had gone home, yet three senators passed the act with a unanimously voice vote. There was no objection. If there had been one person present in the absence of a quorum, the bill would not have been passed.
In 1923, Representative Charles A. Lindbergh, a Republican from Minnesota, and father of the famous aviator Lucky Lindberg stated. “The financial system has been turned over to the Federal Reserve Board. That board administers the finance system by authority of a purely profiteering group. The system is private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people’s money.
Bernanke works for and answers only to the Bank of England.
http://criminalbankingmonopoly.wordpress.com/category/federal-reserve-act-1913/
Issuing "debt-based" currency is a legacy of the pre-1971 gold-backed currency. That gold backing no longer applies, but we still issue bonds equal to the money the government spends. If the government retrieves that money with taxes, it lowers government "debt," but it also withdraws financial assets from the private sector. The accounting identity is that government "debt" = non-government financial assets + current account (which is exports - imports).
So should we be concerned about government running out of money? Only if you're worried about a scorekeeper at a sporting event running out of points, or the bureau of weights and measures running out of inches. In other words: "No."
Does government "debt" present a problem? Not really. We have a sovereign, fiat currency issued virtually without cost. The treasury could literally pay off that debt tomorrow with a few legally-issued trillion-dollar coins it mints. In any case the "debt" is connected to non-government sector financial assets. The bigger the "debt," the more financial assets in the non-government sector.
Trying to reduce debt in the face of a de-leveraging population paying off a load of private debt to fraudulent lenders is just this side of insane.
When Alan Greenspan, the single biggest and most knowledgeable supporter of 'the market will fix itself' hands-off capitalism, comes out after decades of cheer-leading to say, "I WAS WRONG!! The system needs reasonable regulation to survive and prosper", it might be a good idea to listen.
sounds to me like you took your logic courses at yeshiva....
They are lining up to cut off their own noses because the masters of delusion tell them it is necessary.
The nazi's weren't this successful in causing widespread self-destruction.
The good news is that the republicans are lying. No matter what happens, the only way this country will burn is if we get a democrat president and a republican congress after the election.
Any other combo and stimulus will appear.
If it ever happens , and it would under a Romney administration with Republican Congressional control we would have either a Republican civil war emanating from a President elected with Tea Party power , and expecting THEIR ideas to be implemented .... And a President that in effects answers to the Chamber of Commerce branch of RICH Republicans that are in effect the Republican "establishment" .
In the past the establishment invariably absorbed the "revolutionaries" into the establishment fold in a Borg like fashion .... But the Tea Party is different and in no mood to take the back sit ...
Hence my curiosity . It will be a first in political History .
The Republican "Establishment" is one step away from loosing control of their own party in a HOSTILE TAKE OVER ... They will be called RHINOS as Ronald Reagan would be called if he was alive today .
The housing crisis isn't being allowed to solve itself. This is by design.
In response to the collapse of the NASDAQ bubble, the Federal Reserve lowered interest rates to 'stimulate' the economy. Fannie Mae, Freddie Mac, and the Community Reinvestment Act steered all that freshly-printed money into the purchase of mortgages, which in turn bid up the price of real estate, which in turn bid up the price of derivative investments.
The solution is, first, to stop printing money, and second, to liquidate the bad debt. The government is doing exactly the opposite. They've tripled base money since the crisis, and they've purchased at book value the soured assets of Fannie Mae and Freddie Mac, and are keeping them off the market as we speak. This is done specifically to protect the value of the assets the banks still own at the expense of the economy as a whole.
The housing crisis won't end until the markets are allowed to clear, but this means the banks would be forced to eat their losses, and it is the banks that really dictate government policy.
World Resources Institute's estimate of U.S. petroleum subsidies: $300 billion / year.
I'd say government has a role to play.
BTW, taxes on petroleum in Germany: high. Subsidies for solar and passivhaus (energy neutral housing): significant.
The idea that public policy isn't important is belied by the vicious pursuit of control of public policy at all costs, even by people who deny it matters.
Investing the incident savings in domestic infrastructure, and in reinforcing the sagging social safety net, will deliver us from failed “trickle down” into far more promising “trickle up”.
Failure will remain inevitable. The actions of the Fed in exhausting monetary policy options, and running low on quantitative easing are stripping the dollar of its value. The financial elite and their banks are borrowing at near 0%, and misusing the borrowed funds to gamble, without risk, in the derivative markets. “Without risk”, because their loans are secured by the same derivatives, carried on their balance sheets at face value, when they have the same value as the interest rate, zero. If we call these debts, and then foreclose, we will recover everything in the Goldman Sachs vault, one HP printer.
Just like Romney and Obama, the “emperor has no clothes”. The dollar is a chimera, without value, until we resume production and deal with the abomination of publicly supported derivative speculation, an impossibility in the hands of the Democrats, the Republicans, Romney, and/or Obama, bought tools of the 1%.
http://www.voterocky.org/solutions
You now have the best post-web site of the month. keep posting. we still have yet to inform the many here... thanx
I would have never guessed it and totally caught off guard...
By looking at Friedman's clients, Goldwater and Nixon, Bush comes as a really BIG surprise, or doesn't he?
Even Greenspan kept his distance in order to keep his options open. What does that tell you?
And as stated above: "And by 2011, of course, Republicans controlled the House so no further stimulus was politically possible."
Someone mentioned below: What Bernanke couldn't say: " we are screwed"...