Bernanke’s reticence rankles some

Fed chief’s debate-dodging on fiscal policy divides economists

— The Federal Reserve is all but certain next week to begin a multibillion-dollar effort to coax the recovery along, but privately, Ben Bernanke, head of the agency, worries that more is needed to turn the sluggish economy around and revive employment.

He says he believes that without the Obama administration’s $787 billion stimulus program, the nation would have been worse off and that Congress needs to continue to prop up the economy in the short run. He agrees that fiscal measures to support the recovery would probably make the Fed’s unconventional monetary policy more potent.

But Bernanke has been reluctant to prominently voice those views, which were gleaned from testimony, speeches and interviews with people close to him during the past several months. His predecessor, Alan Greenspan, did not display such hesitation, advocating for the Bush tax cuts of 2001 and 2003.

Bernanke appears uncomfortable in that role, which he believes to be outside his purview, especially in an election season dominated by economic anxiety. He has not ruled out weighing in when a bipartisan budget commission named by President Barack Obama delivers its report in December, but itseems unlikely that he will intervene in the battle over the Bush tax cuts.

The hesitance of Bernanke, who was President George W. Bush’s chief economic adviser for six months before becoming Fed chairman in 2006, has sharply divided economists.

Some say he could guide the debate and give a lift to the White House by speaking out against the aggressive budget-cutting proposed by many Republican candidates, particularly those backed by the Tea Party movement.

Others assert that Bernanke needs to be more outspoken in warning of the dangers posed by the country’s debt burden. Still others say the Fed should stay out of the way, given its failure to prevent the financial crisis and the longest recession - from December 2007 till June 2009 - since the 1930s.

Bernanke hasn’t embroiled the Fed in a partisan brawl, and it seems he believes the central bank should weigh in on fiscal policy in only the broadest terms - even if past chairmen, such as Marriner Eccles in the 1930s, Arthur Burns in the ’70s and Paul Volcker in the ’70s and ’80s, at times broke that mold.

“The chairman’s relative reticence is unusual, but it reflects the difficult circumstances in which the Fed now operates,” said Iwan Morgan, a University of London historian who studies U.S. fiscal policy. “Its credibility, which was so high in the Volcker and early Greenspan years owing to its success in constraining inflation, is now atits lowest ebb since the inflationary 1970s.”

Mark Olson, who served with Bernanke on the Fed’s board of governors and is now co-chairman of Treliant Risk Advisors in Washington, acknowledged that “fiscal-policy decisions could either exacerbate or negate monetary policy decisions,” but said Bernanke wanted to avoid the “oracle trap” into which Greenspan sometimes fell.

Bernanke chastised Japan for being too timid in combating deflation and advocated overwhelming force as a response to financial crises - advice he has followed at the Fed.

Bernanke has spoken of the budgetary challenges posed by an aging population. And he came the closest he has in a while to advocating fiscal measures in an Oct. 4 speech in Providence, R.I., when he suggested that the government adopt fiscal rules - in essence surrendering some of Congress’ and the president’s discretion.

Congress already uses so called pay-go rules, which require that spending increases or tax cuts be offset within a 10-year horizon, but there are significant exemptions. Moreover, the rules are intended only to prevent projected deficits from getting worse and do not require Congress “to reduce the ever-increasing deficits that are already built into current law,” Bernanke noted.

Of the dozen economists interviewed for this article, those who favored additional stimulus tended to want Bernanke to speak out.

“Further short-run fiscal expansion paired with credible measures to deal with longer-term deficits would be a good idea,” said Alan Auerbach, a professor of economics and law at the University of California at Berkeley. “The political difficulty of accomplishing this puts pressure not only on the Fed but also on our trade policy, where we are forced to lean more heavily on China.”

William Gale of the Brookings Institution said additional federal spending would be more effective than new debt purchases by the Fed, a strategy known as quantitative easing, and that Bernanke should at least explain the connection between the two.

“By pursuing quantitative easing, he is committing to monetary expansion,” Gale said. “He has the right to say that he has made the commitment, and now it is time for Congress to make a similar commitment.”

Other economists say the Fed has already gotten dangerously close to the Treasury Department, given their collaboration under Bush in bailing out Wall Street, and in propping up the housing market.

“The distinction and separation of monetary and fiscal policy has almost disappeared,” said Alberto Alesina, an economics professor at Harvard. “This is, I believe, dangerous.”

Another Harvard professor, Martin Feldstein, who like Bernanke is a former chairman of the White House Council of Economic Advisers, said, “There have been times when the Fed has in effect said: If fiscal policy is tightened, the Fed will be able to lower interest rates. That does not apply now.”

Business, Pages 35 on 10/30/2010

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