international analysis and commentary

Bernanke and Lagarde versus the policy makers


Economic recovery is in danger and policy makers around the world, particularly in the United States, must take bold actions to spur economic growth and reduce unemployment in the short term while consolidating public finances in the long term. This was the key message that came out of this year’s conference of central bankers and economists in Jackson Hole, Wyoming.

Federal Reserve Chairman Ben Bernanke gave a highly anticipated speech on August 22. He rebuked US policy makers for the bickering that surrounded the debt ceiling negotiations this summer and led to the downgrade of the US debt by the credit rating agency Standard & Poor’s. While keeping the door open for further monetary stimulus by the Federal Reserve, Bernanke fell short of specific commitments, implying that it is the White House and Congress who need to take the necessary steps to help heal the ailing economy.

But considering the deep ideological divide that separates Democrats and Republicans in Congress today, it is difficult to believe that they will come together to make the hard decisions that are needed right now.

Bernanke was not all negative. While acknowledging that the recovery has so far been disappointing, he insisted that the fundamentals of the US economy are solid and that “it may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”

In the short term, he said, unemployment – which continues to hover above 9% – remains the biggest concern, especially the “high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months.” Recent data from the Commerce Department shows other signs of a faltering recovery: in the second quarter of this year, gross domestic product grew a meager 1%.

The key, in Bernanke’s view, will be to find a balance between solving the country’s problems with long-term fiscal sustainability, putting budgets on a trajectory that “ensures that debt relative to national income is at least stable or, preferably, declining over time,” and the need to stimulate growth today. He endorsed ideas such as tax reform and both private and public investments to spur innovation (going in greater legislative detail would exceed the scope of his mandate as chairman of the Fed.)

The Jackson Hole conference has become a chief gathering point for top-notch economists from around the world. In the past, chairmen of the Fed have used this forum to reveal their next moves. Last year, Bernanke hinted at the Fed’s intention to launch a second round of quantitative easing, or QE2, which put it on track to purchase $600 billion worth of bonds with the goal of injecting liquidity into the markets.

Not so much this time. Disappointing those, particularly on the left, who, distrustful of a stalemated Congress, see the Fed as the last resort for stimulus, Bernanke did not offer any specific plan for intervention. Instead, he managed to keep all options on the table without committing to anything. “[T]he Federal Reserve has a range of tools that could be used to provide additional monetary stimulus,” said Bernanke. “The [Federal Open Market] Committee (FOMC) will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”

In step with growing concerns about a less-than-ideal pace of recovery, Bernanke did announce that an already scheduled September meeting of the FOMC will be expanded from one to two days, the 20th and the 21st, in order to allow for greater discussion among members.

But what was most remarkable, and unusual, about Bernanke’s speech was the not-so-subtle jab he took at policy makers in Washington. “[T]he country would be well served by a better process for making fiscal decisions,” he said. “The negotiations that took place over the summer [over the debt ceiling] disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold US financial assets or to make direct investments in job-creating US businesses.”

Bernanke knows this is a political climate dominated by the fiscally conservative, anti-government rhetoric of the Tea Party, where stimulus is a particularly unsavory word, even akin to “treason” according GOP presidential candidate Rick Perry (who said recently that, because of Bernanke’s flirting with expansionary monetary policy, Texans “would treat him pretty ugly” if he ever decided to visit the Lone Star State). In Jackson Hole, it seemed as if Bernanke was trying to put the stimulus ball squarely in Congress and the White House’s court.

Interestingly, some of these same themes were echoed in the remarks of the newly-appointed Managing Director of the International Monetary Fund Christine Lagarde, who also spoke in Jackson Hole. Sounding a generally more pessimistic note than Bernanke, Lagarde warned that the global economy is “in a dangerous new phase,” and that “we risk seeing the fragile recovery derailed.” Like Bernanke, Lagarde said that the situation was only made worse by “a growing sense that policy makers do not have the conviction, or simply are not willing, to take the decisions that are needed.”

And like Bernanke she warned American policy makers that they “must strike the right balance between reducing public debt and sustaining the recovery,” with an eye to tackling long-term unemployment.

President Obama appeared to almost respond to these criticisms. While announcing his appointment of labor economist Alan Krueger to head the White House Council of Economic Advisers, the President said that after the Labor Day recess he will unveil the details of a new economic plan aimed at “put[ting] more money in the pockets of working families and middle-class families.” According to the President, the plan contains “bipartisan ideas that ought to be the kind of proposals that everybody can get behind, no matter what your political affiliation might be.”

The truth is that a highly ideological Congress will continue to represent a challenge, until at least the 2012 presidential elections. A bipartisan committee of Senators and Congressmen, the so-called “Supercommittee”, is already scheduled to meet throughout the fall to try to identify more than a trillion dollars in spending cuts. Real chances of success are slim even in this case, when only cuts are on the table and there is no talk of stimulus of any kind.

During his speech in Jackson Hole, Federal Reserve Chairman Ben Bernanke said, “most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” They may very well be in the province of Congress instead. But will Congress act on them?