June 11, 2011 – 10:46 a.m.
Political Economy: Advocating for the Fed
By John Cranford, CQ Columnist
If the desks of Ben Bernanke and
Obama’s re-election chances in 2012 will, without doubt, hinge, as much as anything, on whether the economy has not only weathered the Great Recession but has rebounded sufficiently to satisfy a majority of the voters. Bernanke, whose second term as chairman of the Federal Reserve will be up on Jan. 31, 2014, almost as certainly will not be asked to stay in the job if Obama is replaced in the Oval Office. If Obama wins, however, it’s also hard to imagine that he would say no to a third term for the Fed chairman, should Bernanke want it.
The point is that these two former academics — one a Democratic politician and the other a Republican technocrat, and arguably the most powerful men in the world — are joined at the hip, at least by circumstance if not by choice. How each performs in his job over the next 12 months will have a direct impact on the fate of the other.
While Obama is out telling the world he has made the right choices for the country and deserves another four years, Bernanke is starting along the same path. Last week, the Fed chairman delivered what amounted to a point-by-point rebuttal to his harshest critics — many of whom are fellow Republicans, either prominent on Capitol Hill or candidates for president.
While Obama’s defense is overtly political, Bernanke’s is far more technical — wonkish, even. While Obama routinely appears at staged political rallies, Bernanke spoke to a conference of economists and central bankers convened to discuss the fine points of international monetary policy.
Still, at some point their two messages may appear to converge. At the very least, one long paragraph on the fourth page of Bernanke’s 16-page text distilled the essence of the ideological war being waged in Washington over the federal budget.
In that paragraph, Bernanke took issue, more directly and clearly than he has in recent congressional testimony, with the push, mostly by Republicans, to make deep cuts in federal spending right now. As he has previously, the chairman conceded that the federal government is on an unsustainable path. Yet he cautioned against going too far, too fast.
“A sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery,” he said. And in emphasizing that the government’s budgetary problems lie out toward the horizon, and pose no immediate danger, he endorsed the idea of adopting “a credible, long-term plan for fiscal consolidation.” Not short-term, long-term.
Bernanke’s was the language of a central banker, and in that sense was more restrained than that of, say, a politician or a columnist. Implied, but largely unstated, was a warning that the Fed has few monetary policy tools left to mitigate fiscal policy decisions that run counter to the nation’s economic well-being.
The Fed is already battling against a retraction in economic support at the state, local and federal levels, he said. “Fiscally constrained state and local governments continue to cut spending and employment. Moreover, the impetus provided to the growth of final demand by federal fiscal policies continues to wane.”
While Bernanke’s message was delivered in economist-speak, he was clear that the recovery is being jeopardized by government austerity plans being put in place from coast to coast.
Moreover, it was his vigorous assertion that the Fed has deliberately stepped in only to aid economic growth that will most grate on his critics. He unflinchingly invoked the central bank’s 65-year-old “dual mandate” of promoting both maximum sustainable development and price stability as critical to the success of the U.S. economy — a direct slap at the objections, raised by many Republicans, that the Fed is dangerously tempting inflation by pumping hundreds of billions of dollars into the financial system and holding interest rates close to zero.
Political Economy: Advocating for the Fed
In the face of all that has happened in the past three years, “monetary policy cannot be a panacea,” Bernanke said. “Still, the Federal Reserve’s actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.”
It’s hard to imagine anyone arguing with a straight face that Bernanke is pursuing a political agenda. If anything, he and everyone at the Fed guard their independence zealously. But if Obama were looking for lines to steal to make his own case, he might look at that speech. The public may not buy the arguments in the end — only time and the ballot box will tell. But the Fed chairman is trying hard to make a strong case.