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Bernanke Takes a Break

Irwin M. Stelzer

“Don’t just do something, stand there,” President Ronald Reagan once advised his staff. Federal Reserve Board chairman Ben Bernanke has decided that remains pretty good advice: In his Friday speech to the world’s central bankers assembled in Jackson Hole, he said that he will not use “the range of tools that could be used to provide additional monetary stimulus,” at least until after an extended meeting of the monetary policy committee next month. He passes the chalice to politicians—he calls them “policymakers”—“to promote stronger economic performance” by adopting growth inducing tax, trade, and regulatory policies. If they do their job, he is confident that nothing that has happened in recent years will prevent the economy from resuming the growth consistent with its strong economic fundamentals.

That is a big “if.” Most Americans doubt that the political class is up to the job of sensible policymaking, since it seems to prefer mutually assured destruction to solving the nation’s problems. Republican politicians have focused of late on the overwhelmingly important issue of whether President Obama is entitled to a brief vacation, and Rick Perry, Texas governor and now the leading candidate for his party’s presidential nomination, says Ben Bernanke, chairman of the Federal Reserve Board, would be “almost treasonous” if he loosens monetary policy. Fortunately for the chairman, even in Texas they don’t execute people for “almost” treason.

Meanwhile, the president refuses to unveil a plan to cope with joblessness, attacks his opponents as unpatriotically putting party before country, while a key supporter, Rep. Maxine Waters, says Republican supporters of the Tea Party can “go to hell” and offers to help them get there. Not an atmosphere likely to reassure most Americans that politicians can muster the collegiality needed to solve the deficit and joblessness problems.

Which is why only 26 percent think the economy will get better next year, down from 40 percent at the beginning of this year. Some 67 percent say the nation is on the wrong track, only 40 percent approve of the way the president is doing his job, and a miniscule 13 percent approve of how Congress is discharging its responsibilities. In short, most Americans think the economy is a mess and due to get worse, and that neither the president nor Congress has any solutions to their problems.

Besides, for Main Street the bad news now is more pertinent than the good news Bernanke has in store for later. Last quarter’s growth rate has been revised downward from a puny 1.3 percent to a miniscule 1 percent. Business investment fell last month, with computers, machinery, and electronic goods leading the drop. Federal Reserve regional banks in Philadelphia, New York, and Richmond all report that manufacturing activity in their areas is declining. New home sales followed manufacturing down, declining for the third straight month to the lowest level since February, and the median price (in the middle of the range of prices) of a new home dropped by over 6 percent in the face of a continuing glut of unsold homes despite near record low mortgage rates.

Although the danger of systemic failure in the financial sector is much reduced, banks are struggling almost as much as manufacturers and homebuilders. Bank revenues in both the first and second quarters fell, accounting for two of the only three declines in the past 30 years. Bank of America is planning 10,000 job cuts, HSBC 30,000 worldwide, UBS 3,500 (5% of its workforce). Even Warren Buffett’s decision, taken as he emerged from his bath, or so he says, to sink $5 billion into 50,000 shares of Bank of America preferred stock failed to impress most analysts (although it did give the bank’s share price a much-needed boost). Buffett’s preferred shares will pay a healthy cumulative dividend of 6 percent, well above anything BofA has paid in the recent past, and he gets warrants valued at $3 billion in addition. Douglas Kass, president of Seabreeze Partners, estimates that BofA is paying 11 percent for Buffett’s capital infusion, a price so high that it casts doubt on the bank’s denial of any need for equity capital. “Warren Buffett just got a great deal. Bank of America, not as much,” summed up David Reilly in the Wall Street Journal. We do not know whether Buffett, who netted $1.7 billion on a similar show of support for Goldman Sachs, will feel that the gains from his BofA deal should prompt him to renew his plea to have his taxes increased.

The struggles of America’s banks pale in comparison with those of their European counterparts, which are having difficulty obtaining short-term funding, in part because they don’t trust each other, in part because U.S. money market funds are fleeing from the risk associated with lending to undercapitalised eurozone banks. That concerns already edgy consumers and investors here, as does the slowdown in the eurozone economies, which makes the export-led recovery on which the Obama administration is counting no longer likely.

That’s the bad news. Here’s worse. Commenting on the just-released report of the non-partisan Congressional Budget Office, its director, Douglas Elmendorf, told the press, “A great deal of the pain of the economic downturn still lies ahead of us.” The unemployment rate is expected to decline from its current level of 9.1 percent to only 8.5 percent by the end of 2012, and to remain above 8 percent until 2014. It will take until 2017, when a reelected President Obama will be gone from the White House, or his successor will have completed his or her first term in office.

The outlook for the deficit is no cheerier. It is reasonable to make two assumptions: most or all of the Bush tax cuts will be extended when they are due to expire at the end of next year, and projected cuts in Medicare payments to doctors will never be instituted (they never have been). In that circumstance, the CBO estimates that cumulative deficits over the next decade will add $8.5 trillion to our current debt of more than $14.6 trillion. After that, as the Baby Boomers demand their pensions, and the joints and organs that will keep them going, the debt really explodes to levels everyone agrees will be unsustainable.

Bernanke warns politicians that their efforts to bring these deficits under control must give weight to “the fragility of the current economic recovery”—read: avoid excessive spending cuts and tax increases now—while creating “a credible plan for reducing future deficits.” That will be music to the ears of the Obama team, which hankers after a new stimulus, promising to become frugal, but not yet.

Meanwhile, since “most of the policies that support robust economic growth in the long run are outside the province of the central bank,” according to Bernanke, he will be an interested spectator, with his limited tools unused, at least for now.

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