MacroScope

Ben Bernanke is trying to have it both ways.

In testimony before the Senate Banking Committee on Thursday, the Federal Reserve Chairman argued that he had tried as much as possible to stay away from fiscal issues that are outside the purview of the central bank. Democratic Senator Jack Reed, of  Rhode Island, asked Bernanke whether, like his predecessor Alan Greenspan, he thought former president George W. Bush’s tax cuts had been appropriate.

The chairman responded:

“I’ve done my best to leave that authority where it belongs, with the Congress.”

What Bernanke didn’t disclose is that back in 2005, while he served as chairman to the president’s Council of Economic Advisers, he was singing a very different tune. In fact, he went so far as to argue in a September 2005 testimony to Congress that the very underpinnings of U.S. economic growth might be compromised if Bush’s controversial tax cut program were not etched into law for good.

“Beginning with the President’s 2001 tax cuts, multiple rounds of tax relief increased disposable income for all taxpayers, supporting consumer confidence and spending while increasing incentives to work and save. Additional tax legislation passed in 2002 and 2003 provided incentives for businesses to expand their capital investments and reduced the cost of capital by lowering tax rates on dividends and capital gains.”

And later in his remarks: 

“We must also continue the types of economic policies that have brought us through these shocks and that will ensure continued healthy growth. These policies include making tax relief permanent, reducing the deficit, strengthening retirement and health security, fostering a healthy and well-educated workforce, promoting fair and open trade, and enhancing energy security.”

BofA Merrill Lynch economist Ethan Harris isn’t buying what he calls ”extreme perma-bear stories” about the U.S. economy. A couple of weeks of disappointing U.S. economic data, culminating in Friday’s weak employment report , revived concerns that the economy was struggling to reach recession escape velocity.

In a research note, Harris said the bad news hasn’t changed his forecast for U.S. economic growth of 3 percent-plus over the next two years. He says the economy has a natural tendency to eventually return to full employment once the “negative shocks” are gone. He points to six major economic theories to support his view, including Keynesian, the Austrian school, and the “financial accelerator model,” which counts Federal Reserve Chairman Ben Bernanke among its advocates. 

But he acknowledges there is one well-known economic theory which does not support his forecast:

U.S. Representative Barney Frank forgot one minor little detail in Thursday’s hearing on overhauling the financial regulatory system — the witness, Federal Reserve Chairman Ben Bernanke.

After Frank and other members of Congress delivered opening statements, Frank launched into a spirited rebuttal of one member’s comments, but was soon interrupted by the committee’s top-ranking Republican, Spencer Bachus.

Bachus: Mr. Chairman, uh, your time has expired. Now if you want to give an additional….

Two days after arriving in Martha's Vineyard, President Barack Obama is taking a break from his vacation to make some news: he will announce that he is nominating Ben Bernanke to a second term as chairman of the Federal Reserve.

Investors have given Bernanke, whose current term expires on Jan. 31, 2010, high marks and had widely expected his reappointment.

But the announcement is being made earlier than expected and comes not just during Obama's family vacation but also on the day that the White House Office of Management and Budget and the non-partisan Congressional Budget Office both release their midyear budget updates.

Dallas Federal Reserve President Richard Fisher at first voted against the Fed’s Dec. 16 decision to aggressively chop benchmark interest rates to near zero, but reversed his decision during a lunch break shortly afterward, a book about the Fed slated for August publication reveals.

“I felt after going for a walk down the hall that I didn’t want to pull the legs out from under Ben, and I didn’t want to be perceived as not being a team player,” Fisher says in David Wessel’s “In Fed We Trust,” an inside look at the Fed’s reaction to the financial crisis that exploded in the summer of 2007.

The Fed’s policy-setting Federal Open Market Committee decided to cut rates by almost a full percentage point, an unusually large cut, to fight back hard against a darkening outlook for the economy, which was in desperate condition after the Lehman Brothers failure and the spreading contagion of soured credits.  Fisher, who had dissented four times that year (including once when he thought the Fed should raise rates to quell inflation worries), at first felt that another move down wouldn’t help the economy and would in fact hurt struggling banks’ profits and people who lived on interest from their savings, and voted against the rate cut before changing his mind.

You’ve heard of Helicopter Ben Bernanke. What about Bazooka Ben? Barclays Capital strategist Michael Pond thinks it’s time for the Federal Reserve to pull out the really big guns and announce it will buy $1 trillion in U.S. Treasury debt in order to counteract a recent jump in Treasury and mortgage interest rates.

The Fed has already said it would buy up to $300 billion, but this week’s bond market drama suggests that investors are beginning to worry that this isn’t enough.

“We tongue-in-cheek believe that the Fed needs to take the approach from former Treasury Secretary Paulson’s quote at a July 15 Senate Banking Committee meeting that ‘if you have a bazooka in your pocket and people know it, you probably won’t have to use it,’” Pond wrote in a note to clients. “While this didn’t work for Secretary Paulson, as he eventually had to use that bazooka and more, the Fed should try to come up with a big enough number that the threat of that purchasing power alone will be enough to keep rates low. For now, we believe that number is $1 trillion and recommend that the Fed make an announcement soon, rather than wait for its June 24 meeting.”  

They won't stay dead!

Members of the U.S. Senate grilled Federal Reserve Chairman Ben Bernanke on Tuesday on whether the next gruesome episode in the U.S. economic horror show could include an appearance of “zombie” banks. 

During Japan’s economic stagnation in the 1990s, the government propped up failing banks and firms that came to be known as zombies.  The failure to let such institutions expire prolonged Japan’s agony, many analysts believe.

Now that the U.S. government is struggling to keep the banking system alive, Senator Bob Corker worried aloud that the government is propping up banks that deserve to die.

Governments threatening to cap the pay of bank bosses in the wake of the financial market crisis might be better off linking their earnings to the more humble salaries of the central bankers now cleaning up the mess.

Politicians from Berlin to Canberra are up in arms about the multi-million dollar bonuses and lavish perks earned by bank executives now that the high-risk debt they allowed to proliferate has brought the global financial system to its knees and forced taxpayers to pledge an estimated $3.2 trillion to fix the mess.

Germany plans to block access to its bank rescue scheme to banks whose executives earn more than 500,000 euros ($673,800) a year — more than the amount earned by the world’s top two central bankers put together.

Democratic presidential nominee Barack Obama and Republican nominee John McCain meet tonight at Hofstra University in New York, their final scheduled appearance together before election day.

The third encounter was meant to be the debate to focus the economy and domestic issues. But the economy couldn’t wait.

The $700 billion government bailout was the first topic at the almost-didn’t-happen-first-debate with PBS moderator Jim Lehrer.