Viewpoint: Ben Bernanke, Enabler of America’s Fiscal Dysfunction

By trying to compensate for poor fiscal policies, the Fed is making it easier for the President and Congress to evade their responsibilities.

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Andrew Harrer / Bloomberg via Getty Images

Federal Reserve chairman Ben Bernanke doesn’t get much respect. PIMCO’s Bill Gross, who oversees some of the country’s biggest bond portfolios, has warned that Bernanke risks rousing inflationary dragons.  NYU professor Nouriel Roubini, who correctly anticipated the 2008 financial crisis, has argued that Bernanke’s policies are failing to help the economy and are instead fueling a stock market bubble that will end in a financial crisis.

Even experts who are sympathetic have been cutting at times. New York Times columnist Paul Krugman has acknowledged that the Fed chairman is a fine economist.  But his long-running disputes with Bernanke – known in some quarters as the Battle of the Beards – have included charges that Bernanke was assimilated by the Fed Borg, a reference to Star Trek’s collective alien intelligence that overwhelms individuality and personal will. Renowned investor and business magnate Warren Buffett has described Bernanke as “a gutsy guy,” but he has also criticized the Fed’s policies as brutal toward retirees, who depend on interest payments from their investments.

Indeed, Bernanke himself acknowledged as much in a 2011 press conference: “We are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people. They have costs for savers. We have complaints from banks that their net interest margins are affected by low interest rates. Pension funds will be affected if low interest rates for a protracted period require them to make larger contributions. So we are aware of those concerns, and we take them very seriously. I think the response is, though, that there is a greater good here, which is the health and recovery of the U.S. economy.”

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It’s understandable that a public official would feel obliged to do whatever is best for the country at any given moment. If the lack of sound long-term fiscal policies is holding back growth, then up to a point the Fed can justify pumping large quantities of money into the banking system as additional stimulus. But there is a limit. In the long run, excessive money creation may engender more problems than it solves.

By compensating – or even overcompensating – for the failings of other government institutions, Bernanke has become the enabler of America’s fiscal dysfunction. The government’s tax and spending policies are way out of whack. By trying to contain the damage caused by this mismanagement, Bernanke has made it easier for the President and Congress to evade their responsibility for crafting sound fiscal policy. Thanks to Bernanke, the U.S. government has become the ultimate case of Too Big To Fail.

Nowadays commentators seem to think the Fed’s chief responsibility is to promote economic growth and bring down unemployment. But in fact, the Fed was originally created for a completely different reason – to prevent bank failures. A severe financial panic in 1907 brought many New York City banks to the brink of collapse, and a disaster was only averted because J.P. Morgan was able to pressure other bankers into raising a bailout fund.

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The financial system couldn’t continue to rely on such private solutions. So in 1913, an institution was established to maintain financial reserves in each region of the country (which is why it was named the Federal Reserve, rather than the Commission for Economic Stimulus and Full Employment).

Over time, the Fed’s brief broadened to include responsibility for maintaining the stable value of paper currency. And at times, the responsibility for fighting inflation overshadowed everything else. In 1977, however, the Federal Reserve Act was amended to create the so-called Dual Mandate.

This change required the Fed to maximize employment as well as maintain the value of the dollar. Fed chairman Paul Volcker didn’t seem to feel constrained by this Dual Mandate. He raised short-term interest rates as high as 19% in 1981 to crush inflation even though unemployment was heading toward double digits.

But since then, the obligation to encourage economic growth and maximize employment seems to have become a bigger and bigger part of what’s expected from the Fed. This isn’t necessarily a bad thing. When the economy is strong, the Fed only has to worry about inflation. And when inflation is low, as is the case now, the Fed really only has to worry about economic growth. But there are two long-term risks.

The first is so-called stagflation. What does the Fed’s Dual Mandate require if inflation is accelerating at the same time that the economy is sluggish and unemployment is high? In that case, the Fed has to aim for two contradictory objectives. Taking a stand against inflation the way Paul Volcker did would risk triggering a recession. But fighting unemployment could force the Fed to turn a blind eye to accelerating inflation.

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In my view there is another, less-recognized danger – a sort of fiscal moral hazard. Fixing today’s economy requires both a long-term budget plan that would bring down future deficits without excessive short-term austerity and a comprehensive plan to enhance long-term growth – by streamlining regulation, reforming the tax system, and encouraging entrepreneurs.

The biggest problem with Bernanke’s policies, in my view, is that the more he tries to compensate for the failures of other government institutions, the easier he makes it for the President and Congress to avoid coming to grips with either budget reform or a growth agenda. Bernanke may shy away from politicizing what he sees as a technocratic job. But it would be better if he were willing to be more outspoken and use the Fed’s own bully pulpit to urge necessary fiscal reforms. Just being an enabler of dysfunction does no one any favors.

7 comments
EthanFarber
EthanFarber

The bottom line is we are doomed. The article keeps talking up Bernake's "genius". I don't see how sitting on a time bomb and hoping it doesn't go off - or doing the economic equivalent of "Duck and Cover" - is a sign of economic genius. Bernake is a man of cardboard, period, he doesn't know what to do and frankly doesn't care, all he does is get paid outrageous sums to periodically appear in front of Congress and contrive to put a worried look on his face.

American business is dysfunctional because it wants to be and the American government is dysfunctional because American business wants it to be; they're quite happy with a government that keeps them from failing, taxes income to pay for the immediate needs of big business while keeping the rich from paying their share, just like in pre-Bastille France. Flatly this whole mess will not get sorted out until the Fed and its T-bill/mortgage Ponzi scheme is dismantled and campaign contributions are banned, so the democratic system can work as intended and things get back in balance. 

Demagogues like Bernake draw their vitality from the popular American belief that the greed of others will serve their own. Americans should remember the biblical wisdom to not build a house upon a bed of sand - and greed is far from a solid basis for the building of a nation.

johnmontana
johnmontana

With respect, this column is not well thought out. A couple obvious points:Low rates are tough on wealthy savers. High rates would be even worse on the millions who cannot find work to support themselves and their families. If Mr. Sivy were unemployed, and not a well known writer, I imagine he would see the Fed's emergency actions in a different light.And the criticism about the U.S. Gov't being too big to fail; what does this mean? Aside from being a smart sounding thing to say, does the author really want the government to fail? To default and wipe out savers?

johnmontana
johnmontana

With respect, this column is not well thought out. A couple obvious points:

Low rates are tough on wealthy savers. High rates would be even worse on the millions who cannot find work to support themselves and their families. If Mr. Sivy were unemployed, and not a well known writer, I imagine he would see the Fed's emergency actions in a different light.

And the criticism about the U.S. Gov't being too big to fail; what does this mean? Aside from being a smart sounding thing to say, does the author really want the government to fail? To default and wipe out savers?

BobDorr
BobDorr like.author.displayName 1 Like

Folks, hello!  Are you listening?  The US has recovered from the 2nd worst recession in history!  Jobs are being created, the stock market is at a new high, corporate earnings are good and growing and the Federal deficit is expected to be down 50%!  Can U here me?  All this is happening while the Euro-zone is falling apart with 25% unemployment, etc., etc., etc.  How about showing a little respect for your Government and your Fed., and yes, Mr. Bernanke!

JohnDavidDeatherage
JohnDavidDeatherage

The equity markets are addicted to the loose money policies of the Fed.  We are in the midst of another financial bubble. That bubble will pop when the Fed stops pumping excess money into the economy. So the Fed faces a dilemma of it's own creation.  Inflation from too much money or stock market bubble bursting when the Fed stops injecting money into the economy.

The problem is the dual mandate of the Fed; control inflation and full employment.  The Fed should have only one mandate, to control price inflation.  Employment is a byproduct of economic activity. 

YesterdaysWine
YesterdaysWine like.author.displayName 1 Like

So, instead of Congress doing its duty and allowing the technocrats to guide their programs accordingly, the article writer is saying that the technocrats ought to act in order to "force" Congress to do their jobs? While I don't think the Fed gets off from all criticism, certainly the author's "proposal" is absurd. Congress is the key player, not the Fed, and as such needs to act in a responsible fashion lowering spending and raising taxes in a fair proportion.