Bernanke Didn’t Go Far Enough

Ben Bernanke gave a good speech yesterday, warning about the dangers associated with not putting the federal budget immediately on a path to credible fiscal consolidation.  But he didn’t push his points hard enough – see my column, joint with Peter Boone, on the NYT’s Economix this morning.

U.S fiscal policies helped break the recent panic by showing that the government will support aggregate spending, irrespective of what the private sector fears.  But once households and firms calm down, you need to demonstrate that the national debt is not on an explosive path.

Mr. Geithner’s speech in China this week, trying to make this claim, was not convincing.  Mr. Bernanke, politely but firmly, pointed this out yesterday.

We should also worry about the Fed, of course, because there is no indication that they are ready, willing or able to curtail their quantitative easing if the real economy definitely turns more positive.  David Wessel’s column in the WSJ today (page A2) has a sensible discussion.

By Simon Johnson

33 responses to “Bernanke Didn’t Go Far Enough

  1. from what i can tell the whole bailout/PPIP/badbank’citigroup’/slush fund is a very over managed ‘like that will do something’ mess.

  2. Pa’ git cher’ credit card the government man is commin’

  3. Simon – I know that Baseline Scenario is focused on national issues, but you may want to take a look at how the crisis is impacting local areas – and how budget deficits are destroying local economies.

    And in particular, you may want to check out what’s happening in Chicago.

    There is a crisis in that city over parking meters that could just take down the mayor. In an attempt to raise capital to fill an enormous budget shortfall (one that had grown significantly larger thanks to the crash), Daley’s been selling off city assets – in this instance, the 36,000 parking meters – to a company with ties to Morgan Stanley, no less.

    The Chicago inspector general released a report the other day blasting the deal, which was done without much transparency, apparently at a huge loss to the city.

    The private company operates as a monopoly – which meant that for Chicago, parking rates quadrupled after they took over the meters. Quadrupled.

    It’s a fascinating case study for economists, I would think…. (I’ve included some links to stories about this in my blog – the Chicago Reader, in particular, ran an excellent story in April outlining the deal and its timeline.)

  4. E. Barandiaran

    Simon, you’re wrong. Bernanke has gone too far, and so Obama has done. More important, Obama has given no signal that he wants to come back (actually, he’s still promising more spending), and Bernanke has shown that he’ll do it again if HE thinks it is needed. Anyway, they will have a very hard time coming back from where they have already gone. As you can learn from Argentina’s economic history in the past 80 years, it’s very difficult to restore the source of stability you are asking.
    I think Daniel Henninger’s WSJ column reflects much better what is going on in your country: too fat, to fail.

  5. A sad, if unsurprising, story.

    It does clearly point the way forward for us peasants, though: stop spending. In Chicago, obviously to the extent possible, stop using the parking spots. At home, stop consuming, especially with credit cards. We are finally in control of this economic system–we have the power of the purse.

    Let’s bring it down!

  6. When Bernanke speaks before Congress, he goals go far beyond expressing a personal view of policy.

    I think Robert Reich got this one right. Bernanke is trying to do one of two things (or both): 1) Deliver a message to Congress from the Obama administration that Obama does not wish to deliver himself; 2) Reinforce the Geithner World Tour theme that foreign investments in U.S. Treasuries are “safe”.

    I think he is actually concerned that the rest of the world may start to balk at financing our little multi-trillion-dollar Keynesian experiment. Whether those concerns are well-founded, I have no idea.

  7. Rickstersherpa

    Professor Johnson, I am surprised that you don’t note the implications of Bernanke’s testimony regarding the necessity of Fiscal retrenchment, something which you do note in your Atlantic article. It seems that having spent huge sums to rescue the oligarchs directly and indirectly (the 19 financial institutions “to big to fail” and all of AIG’s counterparties), apparently it is the poor and middle class who will bear the burden of fiscal restraint, with reduced social security and medicare benefits and regressive tax increases being the solution. God forbid that we ask the rich ask to pay more.

    I still hear and read a huge denial of in reality elite opinion. Real median wages and median incomes in the U.S. continue to fall, and with the destruction of housing wealth, more and more home “owners” are in reality “renters,” with no equity to draw on even in emergencies, little lone for the “wealth” based econsumption that provided the engine for economic growth from 2002-6. Now households, that still have jobs, are deleveraging and trying to save as each month’s retail sales figures confirm. Yet, the world, led by both Germany and China, while lecturing us on our spendthrift ways, seem to believe that exports to the U.S. will resume in the same old way. That demand is not there anymore though, and no one has come up with a substitute for the now broke middle class consumer in the U.S. That person is now the U.S. saver, whose need for increasing her savings will be highlighted when the elites immiserate those on social secuirty and medicare to pay for continued tax cuts and bailouts for the oligarchs.

  8. Simon, you, Bernanke & Geithner seem to be having difficulty seeing the forest for the trees. It’s not about printing paper money & giving it to those who made stupid investments with billions of OTHER PEOPLE”S savings dollars. Then rewarded themselves with more billions of OTHER PEOPLE’S savings dollars as bonuses for making the stupid investments. It’s about punishing them.

    More importantly it’s about producing food, clothing, shelter, transportation, energy & health care & moving them around. Banking is only a small part of this overall effort. Banking is solely about taking control of excess money earned by those who produce food, clothing, shelter, transportation, energy & health care & lending it to those who will increase the supply of these things. And banking should be rewarded when they do a good job & punished when they don’t, just like everybody else.

    All the esoteric discussions about derivatives, CDO’s, CDS’s, etc, is diverting attention from the failures of those in charge (Bernenke, Geithner, et al) of fixing our economy(not just the banking system) by punishing those in the banking system whose stupidity has severely damaged our economy by misallocating working people’s life savings to stupid investments.

  9. “It’s about punishing them.”
    Chas is right except Dr. Simon does not belong in the group, but Congress does.

  10. Please don’t suggest that the government should look to “secure other sources of revenue” in order to lower the deficits.

    We need more taxes like we need a hole in the head.

    The US government needs to reduce its foreign military presence, end the entitlement programs that are ticking away ready to explode in a few years time, and reduce the overall size of the federal government.

    This is the only way to produce fiscal stability. Simply taxing citizens to a greater extent promotes further government spending and waste.

  11. Pingback: Market Talk » Blog Archive » Budget Deficits Have Taken Center Stage

  12. I am glad you mentioned Wessel’s column. That really was a brilliant overview of inflation fears.

  13. “apparently it is the poor and middle class who will bear the burden of fiscal restraint, with reduced social security and medicare benefits and regressive tax increases being the solution. God forbid that we ask the rich ask to pay more.”

    IMO, that is the reason the “person” who wrote this article, the IMF, the fed, the chinese central bank, and the spoiled and the rich exist. That would be to take from the lower and middle class for their own personal gain.

  14. If the author is worried about “crony capitalism”, what is being done to prevent the IFM and/or china from becoming the next destination for the “crony capitalists”???

  15. Make that the IMF, not IFM.

  16. I think you’ve hit the nail on the head.

  17. I think you are absolutely correct. Most economists and finance professionals in the ivory towers,on Wall St., or in DC express views from a very narrow framing. They want solutions built out of the same “materials” used to construct the gamblin’ games that have lead to this fleecing of the taxpayers.

    We need new paradigms, sans typical finance “solutions.”

    I say back to basics.

  18. And EACH of Wessel’s four scenarios actually seems viable – maybe not tomorrow, but certainly in the forseeable future.

  19. Mr. Bernanke & Geithner’s refusal to hold the Wall St. bankers who made stupid investments with other people’s money, bankrupted their banks & caused this financial crisis accountable will result in deterioration of our economy into oblivion over time. Why haven’t they (bankers, Bernanke & Geithner) at least lost their jobs & pensions? Why hold small banks, GM & Chrysler & all other companies, large & small accountable for making stupid (bad?) investments & not the Wall St. bankers? Of course Simon & James have answered this.

  20. I don’t see any way that deficits are coming down substantially. Politically it will be impossible to slash entitlements – old people vote, and there are going to be a lot of boomers.

    We know the wealthy will just move capital and jobs from the country rather than get taxed more.

    The military will never get cut.

    The US is headed towards sovereign default or a dramatic devaluation (in whatever form that takes). But this has already been done before. Ending the gold standard without notice was a form of default.

  21. Excuse my poor grammar – accountable in wrong place -

    Mr. Bernanke & Geithner’s refusal to hold the Wall St. bankers accountable who made stupid investments with other people’s money, bankrupted their banks & caused this financial crisis will result in deterioration of our economy into oblivion over time. Why haven’t they (bankers, Bernanke & Geithner) at least lost their jobs & pensions? Why hold small banks, GM & Chrysler & all other companies, large & small accountable for making stupid (bad?) investments & not the Wall St. bankers? Of course Simon & James have answered this.

  22. As an historian, I’d like to recommend to all those that have posted on this blog to turn their attention to ‘The Rise and fall of the Great Powers’ by Paul Kennedy, revised in 2000.
    This book highlights what happens when ‘great powers’ over extend themselves – clearly as the USA has done since the demise of communism as a force in 1991.
    I have to say, that economics and politics are sides of the same coin and that the US has made many mistakes it could have avoided after the fall of communism – giving free reign to capitalism in the form of the banking community has proved an absolute disaster for the majority of the world’s democracies, led by the the cheerleader in chief, the United States.
    Obama, by surrounding himself with the exponents of failed policies past, is now seriously undermining his own efforts to strengthen the United States.
    By gutting the heart out of the country by pursuing policies that disadvantage the majority of those that live in the USA, the country has set a dangerous precedent and should change economic direction now, rather than wait for the expected second phase of the current economic downturn to force Washington’s hand.
    Whilst usually a pessimist, one has always been impressed by the US ability to reinvent itself, particularly given the nation was written off in the 1980′s as japan and the Asian Tigers set the pace.
    I suggest all nations look at the real impact of globalisation on its working class and middle class inhabitants, clearly this has again been a disaster – yet the IMF and World Bank keep espousing this cause and huge nationalisations that only benefit the elite of any country.
    Monetarism and Friemanite economics have clearly failed the majority, perhaps its time for liberalism to re-awaken and offer an alternative to the current economic ideology that is so damaging to so many of our fellow human beings.
    I’d start by making sure that there is a level playing field as far as globalisation is concerned, or as Marx pointed out more than 140 years ago, capital will exit to the lower cost producers to maximise profit. Indeed, our financial ‘masters of the universe’ even forgot this dictum and just concentrated on making obscene profits by concentrating on finance alone – leaving the US taxpayer with a US$12 trillion hangover.
    When will these guys ever learn!!!!!!

  23. taniebiletylotnicze

    Printing so much money will only get USA in so much more trouble. I hoped obama would have a different concept… then again why would he. The FED does what it wants anyways regardless of anybody..

  24. Chris Rogers: “When will these guys ever learn!!!!!!”

    The historians plaint!

    “This book highlights what happens when ‘great powers’ over extend themselves – clearly as the USA has done since the demise of communism as a force in 1991.”

    I was surprised at how little that happened under Clinton. And then I was dismayed at how much it happened under Bush II.

    Chris, what is your take? Do you think that Clinton over-extended? Thanks. :)

  25. I mostly find your blog clear and informative, but every now and then you overestimate the economic literacy of your readership.

    In other words, what is fiscal consolidation?

    And what the heck does this mean?

    “ The American state is fiscally underdeveloped, given what we are trying to achieve at home and abroad. This needs to be explained clearly and repeatedly by our top leadership.”

    I think this needs to be explained clearly and repeatedly to me too.

  26. Privatization of parking meters. That’s really intrepid.

    I wonder what the economists at University of Chicago think of this?

  27. Bernanke also has an agenda. He does not want to be the Fed chair who allowed hyperinflation.

    It’s all about credibility – the ideal situation of the Fed is to print money without everyone expecting inflation. In order to achieve that, he needs Congress to send a credible signal that spending will decrease when money velocity picks back up.

    Congress is not going to allow this to happen when the employment rate is 10% (and undermployment is 16%).

    Inflation will happen, but the absolute worst possible scenario is to ineffectually fight inflation while the whole world anticipates it (and the anticipatory response causes disaster).

    However, I will object to the characterization of this as a Keynesian experiment. It is not, because the US has an open economy. Keynesian stimulus in an open economy bleeds outward, incurring debt while stimulating other economies. Moreover, the owners of that debt cannot be taxed through traditional mechanisms, so there is a net loss of wealth (as measured by currency holdings and international debt).

  28. It means we’re not pulling in enough in tax revenue to meet our lofty ambitions.

  29. Wessel was solid, but only touched on the degree to which this can be self-fulfilling. It is feasible to observe a run on the dollar. In practice, that happened last August when oil 150 a barrel. The current run to commodities is a mini-replay of that. This could trigger false commodity-led inflation even in an environment of slack demand.

  30. The Fed needs to strongly signal that if dollar flight continues it will raise rates, and compensate by expanding targeted credit programs to avoid killing the broader economy.

    Here is why:

    SJ and Boone call this one correctly, but miss one small point.

    The issue with low interest rates is not simply that interest rates are globally too low. Certainly, for homeowners struggling as rates reset, there’s little fear that they will go out and spend a ton of money.

    The problem is WHO has access to those cheap rates. And it isn’t struggling homeowners. Some – those with good credit – have been able to refinance (until just last week when rates spiked). But many who are benefiting are the banks (that are trying to earn their way out of insolvency), and highly leveraged financial players – precisely the ones who are borrowing US dollars cheaply to (effectively) short sell the US dollar by buying assets abroad that are denominated in foreign currency. (Hello Goldman Sachs)

    The Fed’s dilemma is that that the discount rate and other broad instruments are so blunt. To his credit, Bernanke has been creative in launching innovative targeted credit programs (some backed by TARP funds) – and Fed policy should shift more toward those tools. (And with the public-private partnership collapsing, there’s more TARP money to back targeted Fed programs.)

    Kudos to the Fed for going at deflation. But now the Fed is in effect funding capital flight from the US dollar… Ugh.

    It’s reminiscent of the dollar-yen carry trade, but this time we’re on the losing side.

    http://www.moneyweek.com/investments/what-is-the-carry-trade.aspx

  31. Min,
    With the demise of communism it was assumed that the US and many other states would curtail their military/industrial complexes and concentrate on domestic reforms of their own – in the case of Clinton, medical health reforms were a priority in his election campaign. However, his radical reform agenda was not to Wall Street’s liking and abandoned due to costs.
    Now here’s the rub, the Goldman Sachs leadership at the time – 1992 – were instructing Clinton on economic matters and what Wall Street would stomach, that is, an unelected oligarch was telling the democratically elected head of state what and what not could be undertaken by his administration.
    In the same period, the US assumed the role of the world’s sole policeman, and as such, military expenditure, rather than being cut drastically, just had some minor surgery – a reduction a nuclear arms being one part of this, nuclear arms research though continued unabated, as did small foreign adventures.
    Further, the same clique that told Clinton what and what he could not do in 1992, was the same clique enamoured to free market/Friedmanite principles. Hence, at the tail end of Clinton’s second administration, Glass-Steagal was repealed.
    The rest as they say is history, although one with a US$12 trillion sting.
    Further, and if you look closely, since the collapse of communism, we have witnessed the rise of another bogeyman – namely militant Islam and the so called rouge states, which means the military/industrial complex has been given a whole new lease of life.
    Successive governments since Clinton have failed to embark on comprehensive radical internal reform within the USA and allowed the neo-conservatives and disciples of Friedman free reign in both economic and foreign affairs.
    The result is a technically bankrupt nation with more overseas military bases than in 1991.
    I say this as a person who has studied the demise of his own nation, namely, the UK, which in a single generation went from being a global power to a peripheral European power.
    The moral in this tale is clear, be very aware of China in the coming years – much of its prosperity being the direct result of US manufacturing being moved to a totalitarian country with no respect for the individual.
    Whilst being all in favour of free trade, read globalisation, I think it fair to say that this only works on a level playing field.
    Unfortunately your bastardised banking sector has made sure its the USA disadvantaged and not its undemocratic trading partners. Is it little wonder that most of the former broker dealer profits currently are generated in the Far East, and not the USA itself.
    I trust this answers some of your enquiry.
    There are many key juncture to highlight in the past 20 years, another could be when Goldman Sachs became a listed company.
    From an academic perspective, its good to contrast ‘The Rise and Fall of the Great Powers’ with Fukyama’s ‘The End of History’, a thesis even the author now rejects.

  32. Many thanks, Chris. :)