Business Times - 07 Oct 2011
Is Bernanke trying to jump into political fray?
He partly blames his Congressional critics for what he calls faltering economic recovery
By LEON HADAR
AT ONE point during his Congressional testimony on Tuesday, it sounded as though Federal Reserve chairman Ben Bernanke was about to join the demonstrators protesting in New York and other US cities against Wall Street and corporate greed.
The protesters were blaming 'with some justification the problems in the financial sector for getting us into this mess', Mr Bernanke said after being asked about the protests during his appearance before Congress's Joint Economic Committee.
'At some level, I can't blame them,' he said as he pointed to the above 9 per cent unemployment rate.Â Americans were 'dissatisfied with the policy response here in Washington', the head of the US central bank warned American lawmakers, directing much of his criticism towards the legislative and political stalemate on Capitol Hill that has made it close to impossible for Washington to start putting the nation's fiscal house in order.
Indeed, after months during which Republican lawmakers and presidential candidates have been going out of their way to bash Mr Bernanke for pursuing a loose monetary policy and serving as an institutional enabler for President Barack Obama's robust fiscal policy, Mr Bernanke seemed to be joining Washington's political fray by placing part of the blame for the slow economic recovery - the 'faltering' economic recovery, as he put it - on the shoulders of his Congressional critics.
And that, in turn, led to several angry exchanges between the Fed chairman and Republican lawmakers who expressed their displeasure with Mr Bernanke's comments and performance.
Mr Bernanke's appearance on Capitol Hill, a few days before the release of a new report on America's unemployment rate, coincided with a blast of bad economic news, including the debt crisis in Europe, weak consumer confidence and poor job numbers that have been placing a downward pressure on US economic growth.
And, indeed, the economic picture painted by Mr Bernanke was bleak and depressing. He said that the economic recovery was 'close to faltering' and told the lawmakers they cannot 'safely or responsibly' delay making 'difficult and fundamental fiscal choices'.
The recent data pointed to 'the likelihood of more sluggish job growth in the period ahead', he warned, pressing the lawmakers to 'to make sure the recovery continues and doesn't drop back'.
It is not a political secret that Congressional Republicans have been frustrating the efforts by the White House to advance a 'grand bargain' over fiscal policy that would involve taking steps to reduce the huge deficit through a combination of large government spending cuts and raising taxes on America's wealthiest. By continuing to resist any plan that would involve raising taxes, the Republicans have brought the progress towards a deficit-cutting deal to a halt.
Mr Bernanke, a student of Milton Friedman and a staunch free market-oriented economist who was first appointed to his job by Republican president George W Bush, did not blame the Republicans for the mess in Washington. But it was not difficult to conclude after listening to him that he would have liked to see them working together with the White House to come up with a new bipartisan fiscal policy.
The Republican lawmakers, in turn, made it clear that they regard Mr Bernanke as Mr Obama's monetary twin. Hence, Representative Mick Mulvaney, a Republican from South Carolina, contended that the Fed's drive to lower interest rates was encouraging the Obama administration to borrow more.
'One of the unintended consequences of doing what you're doing is you're making it easier for us to continue to do what we're doing, which is to borrow money,' he told Mr Bernanke.
'I don't think that's a valid point,' Mr Bernanke responded. 'We keep interest rates down somewhat. I don't think that eliminates the responsibility of Congress to take its own action.'
All the leading Republican presidential candidates have been very critical of Mr Bernanke and have promised not to reappoint him after replacing Mr Obama in the White House. Republican lawmakers echoed these sentiments during Mr Bernanke's Congressional appearance. Leading the charge were Tea Party fans such as Senator Mike Lee, a Republican from Utah, who charged that the Fed was operating under a 'general veil of secrecy'.
Mr Bernanke described these charges as 'urban legend', noting that the Fed has been 'very thoroughly audited at this point', insisting that 'nobody's found any impropriety whatsoever'.
In a way, Mr Bernanke's comments were directed at both Republican and Democrats and the entire political and media class in Washington. The Fed would not be able to rescue the economy and prevent another recession, he said, adding, monetary policy was not a 'panacea' for America's economic problems.
A Super-Committee consisting of Democratic and Republican lawmakers is trying to draw the outlines of a plan to cut US$1.2 trillion of the US annual deficit. Most observers do not expect the bipartisan group to reach a deal before next year's presidential and Congressional elections. In that case, the cuts of that magnitude would be imposed automatically and across the board.
But Mr Bernanke argued that even US$1.2 trillion would not be enough in terms of achieving long-term fiscal targets. 'Accomplishing that goal would be a substantial step; however, more will be needed to achieve fiscal sustainability,' he told the Joint Economic Committee.
Mr Bernanke did make it clear that the Fed would be ready to take 'appropriate' action to help the economy, but in reality there is not much that it can do at a time when interest rates are close to zero, with the Fed announcing that it would keep it that way for the next two years.
Some Republicans have claimed that Mr Bernanke's 'easy money' policies are producing inflationary pressure, but there are no indications that this was happening.
Under Mr Bernanke, the central bank has been pursuing out-of-the-box monetary schemes. Most recently, it announced in September that it would be overloading its portfolio with longer-term securities, buying up US$400 billion of long-term bonds while selling off the same amount in short-term securities aka 'Operation Twist'.
Democratic lawmakers defended Mr Bernanke during his appearance, noting that the central bank's mandate includes fighting inflation and unemployment. But some Republicans want to change that and reduce the Fed's mandate to containing inflation, and not to maximising employment.
This is the way politics as usual plays out in Washington.
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