Stimulus, Or Austerity? Bernanke Recommends Both
Fed chairman Ben Bernanke addressed the Senate Finance Committee Wednesday afternoon in a semi-annual monetary report. The questions and answers contained little new information, but to the markets enjoying strong second quarter earnings it was a buzz-kill, and traders disrespected the Chairman with a sharp selloff that started right at 2pm, before he even had a chance to say anything:
Thanks to Google Finance
What I wanted to hear was his view on the current struggle among economists -- whether the U.S. and other grown-up countries need to keep their foot on the gas and keep the fiscal stimulus going, or to lighten up and let the private sector do its work of creating jobs, showing the world markets that the government is committed to fiscal stability.
Of course, there is no one answer to such a multilayered and multiyear question. (That's not to say there might not be a right answer.) I scribbled a few notes of his testimony:
It's not a question of either-or, but a combination. It's definitely important to support the economy, and I would be reluctant to withdraw that precipitously.
But it's also important to demonstrate that we are serious on the long-term budget deficit issues. The current trend is unsustainable.Bloomberg covers the testimony in greater detail (but then they have two people devoted to the story).
In his eight-page statement to the committee, Bernanke devoted almost 10 times as many words to discussing the exit from stimulus as he did to potential actions to boost growth. Exit options include reinvesting proceeds from maturing Treasuries into shorter-term issues, selling housing debt and raising the interest rate paid on the $1 trillion of bank deposits at the Fed, Bernanke said.Good point -- he did go on a bit about the different techniques they have lined up for unwinding the monetary stimulus, but that's fitting, since what they have put in place hasn't really been tried before. Moreover, showing that he has a detailed plan for removing the monetary measures sends a message to the markets that he knows what he's doing.
In the markets after 2 pm, interest rates fell too -- the 10-year at 2.87 percent, ouch! -- suggesting that the markets are not yet concerned about America's imminent default, but rather its lack of economic pep.
Also from Bloomberg:
The average growth in private payrolls of 100,000 a month this year is "insufficient to reduce the unemployment rate materially," and it will probably take a "significant amount of time" to restore the almost 8.5 million jobs lost in 2008 and 2009, Bernanke said in his prepared remarks.That's why we can't pull the fiscal stimulus just yet, and have to keep measures like benefits to the hard-core unemployed flowing. (I've been there, and watched my unemployment benefits run out. Very discouraging.)
He also noted that something's got to be done to maintain the skills of the long-term unemployed. Corporate America doesn't seem to be interested in helping, so it falls to government. But The NY Times wrote this week that such programs aren't helping much.
The Financial Times is running a debate among economists, presenting for the past few days articles by big thinkers, some for more stimulus, some for fiscal restraint. (It's hard reading.)
I think we've got to pour on the stimulus. Businesses aren't stepping up to do their part to hire people, notwithstanding $3 trillion in cash reserves, and banks aren't lending (partly due to a lack of demand). The business lobbies are complaining about reducing uncertainty by cutting the deficits, but that's just their way of asking for tax cuts. Of course the U.S. has to guard its credit rating, and the dollar's position as the world's reserve currency, but 60 percent of our economy comes from the consumer, and unless we're growing again we won't be strong enough to make the needed long-term adjustments.