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