Bernanke’s deficit warning helps Obama
– James Pethokoukis is a Reuters columnist. The views expressed are his own –
Sorry, Larry Summers. It’s looking more and more likely that you’re going to be stuck in the West Wing for the duration.
See, if your boss fails to reappoint Ben Bernanke as Federal Reserve chairman come January, it would be a public betrayal worthy of the television reality show “Survivor.” For President Obama has no greater ally: Bernanke is truly the gift that keeps on giving.
The latest evidence came on Wednesday during Bernanke’s testimony before the House Budget Committee. The Fed chairman offered a stern warning about America’s huge budget deficits.
“Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,” Bernanke said.
Tough, but hardly atypical Fedspeak.
Then Bernanke went a step further. He gave significant credence to the view that the recent rise in long-term Treasury yields and mortgage rates was caused by deficit jitters:
Fed sets out exit strategy
– John Kemp is a Reuters columnist. The views expressed are his own –
Intense criticism of the Fed’s role in the financial rescue program and the decision to triple its balance sheet, including monetizing a portion of the Treasury’s debt, has forced the central bank to issue an unusual defense of its actions (http://www.federalreserve.gov/newsevents/press/monetary/20090323b.htm).
It attempts to placate critics by acknowledging the real risk of inflation, and marks the Fed’s first attempt to set out an “exit strategy” for ending quantitative easing and other credit programs once the crisis is safely passed.
The joint statement issued with the U.S. Treasury reflects “the common views of the Treasury and the Federal Reserve on the appropriate roles of the Federal Reserve and the Treasury during the current financial crisis and in future.”
The last time the Fed and Treasury were forced to reach such an agreed statement defining their respective responsibilities was in 1951. Over the previous 15 years, monetary and fiscal policies had largely become fused as a result of the Great Depression (with interest rates kept artificially low to support recovery, then abandoned as a tool of monetary management in favor of reserve requirements) and World War Two (with rates repressed to help finance the government’s massive borrowing program).
Even after the war had finished, the Fed held short-term interest rates at just 1 percent. Rates did not begin to rise until the start of 1948, and they were still at just 2 percent by the end of 1952 (https://customers.reuters.com/d/graphics/WARTIMEFINANCE.pdf).
Crucially, the Fed also enforced a 2.5 percent ceiling on long-term Treasury yields through open market operations to hold rates down and support the federal government’s massive wartime borrowing program and the need to refinance the debt at low cost. Precisely what the Bernanke Fed is now doing through its Treasuries purchase program.
Smart moves;
Question is will it work this time the same way it did over 50 years ago?
The fifties were a period of growth where a lot of pent up demand was satisfied, allowing the fed and treasury to release/distroy this hot air as needed without creating inflation.
How will this be possible today with lower growth rates?
I do not know the how much money was involved then, but I would think it will take a long(er) time this time. In my opinion, they are playing with fire here, but is there another choice?
Economics and politics go together like love and divorce. What is good economics is often bad politics. The reverse is just as often as true. To advance your own political flavor by making fun of any ideas that do not tow the line of your own economic and political ambitions is a trait of most politicians, not economists. It is not hard to guess the political persuasion of this articles writer. May their opinion be blended with other voices of dissent and the resultant noise relegated to the appropriate dispersal of inane commentary. What this country needs is a good listener with the experience and knowledge to choose which options will lead us out of this mess. We already have enough nay sayers, they do not need any help wanted signs, or maybe they do.