Bernanke: The 2 Big Risks We Won’t Resolve
Strange comments in this morning’s speech by Dr. Bernanke. He says:
“Risks to the Outlook
Participants at the June FOMC meeting indicated that they see a higher degree of uncertainty about their forecasts than normal and that the risks to economic growth have increased. I would like to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation.Earlier this year, financial strains in the euro area moderated in response to a number of constructive steps by the European authorities, including the provision of three-year bank financing by the European Central Bank. However, tensions in euro-area financial markets intensified again more recently, reflecting political uncertainties in Greece and news of losses at Spanish banks, which in turn raised questions about Spain’s fiscal position and the resilience of the euro-area banking system more broadly. Euro-area authorities have responded by announcing a number of measures, including funding for the recapitalization of Spain’s troubled banks, greater flexibility in the use of the European financial backstops (including, potentially, the flexibility to recapitalize banks directly rather than through loans to sovereigns), and movement toward unified supervision of euro-area banks. Even with these announcements, however, Europe’s financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States. Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook.
The Federal Reserve remains in close communication with our European counterparts. Although the politics are complex, we believe that the European authorities have both strong incentives and sufficient resources to resolve the crisis. At the same time, we have been focusing on improving the resilience of our financial system to severe shocks, including those that might emanate from Europe. The capital and liquidity positions of U.S. banking institutions have improved substantially in recent years, and we have been working with U.S. financial firms to ensure they are taking steps to manage the risks associated with their exposures to Europe. That said, European developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy.
The second important risk to our recovery, as I mentioned, is the domestic fiscal situation. As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. The Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect–a scenario widely referred to as the fiscal cliff–a shallow recession would occur early next year and about 1-1/4 million fewer jobs would be created in 2013.3 These estimates do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved. As you recall, market volatility spiked and confidence fell last summer, in part as a result of the protracted debate about the necessary increase in the debt ceiling. Similar effects could ensue as the debt ceiling and other difficult fiscal issues come into clearer view toward the end of this year.
The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.”
The good news is that they seem to be thinking in a more proactive manner. The problem is that they just seem to be thinking about it and not doing a whole lot. Bernanke thinks the Europeans have the tools to resolve their crisis. This is true. But they don’t have the political will to resolve the currency crisis – a true resolution would involve a full break-up or full unity. I still don’t see signs that they’re resolving that issue. Rather, they seem to just keep kicking the can. I don’t know why Bernanke isn’t more critical here. This ridiculous crisis never ends. And he’s just fine letting it persist – or so it seems.
On the fiscal side Dr. Bernanke clearly has no idea that our true constraint is always an inflation constraint and not a solvency constraint. As an autonomous currency issuer we are never going to “run out of money” like Greece or a household. If he understood this he wouldn’t call the fiscal path “unsustainable” in the same speech where he says rates of inflation “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” His recommendation on the path of fiscal policy sounds like vague political rhetoric and nothing more.
I don’t understand why he isn’t more direct and specific in these testimonies. It’s one of the few times where he gets to be face to face with the lawyers running this country and cue them in on a few things that matter on the economic side. This speech is just more vague rhetoric without a real path or purpose. Bernanke might know there are risks out there, but he doesn’t seem to be trying very hard to help us avoid them….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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15 Comments
What does he care at this point? He might not understand everything, but he knows he’s tried a lot and that it’s not working. He’s probably stopped caring at this point.
I’m not sure what it is you’d like Bernanke to do about the Euro crisis. Sure, he could be more critical but he can’t rectify massive political/cultural differences between sovereign nations that have existed for centuries.
I know he can’t fix Europe, but why not clearly define what the problem is and express an opinion regarding a resolution? He talks like a politician who’s just saying things for the sake of saying things rather than being what he should be – a problem solver.
A big part of these testimonies is for him to express his opinions clearly and give leaders a path to take. He just doesn’t do that. He’s so vague about so much that it’s all pretty much a big waste of time.
Probably helps him to keep his job.
*BERNANKE SAYS FISCAL CLIFF MAY PROVOKE INTEREST RATE INCREASE
Or maybe he’s just as clueless as the rest of them
Bens top 6 “Clear” responses
1)”Bank capital” regs based on “Global Standards” is clear—This is a serious mistake for the USA and a side step to regs that provide safety against systemic risk for US Banks
2)Don’t mess with my “recovery”–your politics stink
3)I don’t know anything about “LIBOR”–I’m not involved
But I will have a “robust” investigation of my collegues
4)Inflation–what Inflation? we count the cost of pencils and the price is stable
5)Monetary Tools R US–I dont realy know what results they are having but I do know that NOT doing something would be bad for the ” Markets ”
6)Europe has the tools to handle there problems
Means–I have enough problems of my own
The germans and the english are in the same bed
who woulda thunk it!
The Europeans aren’t going to take criticism or lecturing from the USA anyway, so why bother? If Bernanke lectured them, they would just dig their heels in harder. Merkel would start sounding like Herman Cain.
“supreme exercise & testament to vagueness.
I don’t see how anyone could out-excel him ”
Greenspan!
The Maestro!!!!!
Yeah, the Maestro. He packed up and got out of Dodge before the Housing Bubble turned into a pumpkin. Dumped the whole mess into Bernanke’s lap. I will never believe that the timing of his retirement was a coincidence.
In spite of the notion that it is a ‘private corporation’, the Fed’s authority derives from Congress and its Constitutional ‘power of the purse’. There is, however, good reason to have its control of monetary policy be insulated from direct political influence.
In line with that separation, one of its biggest responsibilities should be to inform Congress on a regular, public basis, when the latter must exercise its control over fiscal policy to accomplish what monetary policy alone cannot – specifically when increased fiscal ‘deficit’ is needed to stimulate the economy, and when this needs to be reduced to forestall inflationary pressures.
Obviously, the Fed would need to understand the reality of our fiat monetary system in order to do this.
Given the political situation where Romney and the Republicans who control the House have said that they plan to fire Bernanke and hire a new Fed chief, then Ben must be careful in what he says. Even though he was appointed by the Republican Bush, his ally now is clearly Obama and the Democrats in how he would like to fight this balance sheet recession. But he can’t say that. Fed Chiefs are supposed to be non-partisan and theoretically independent. So Ben is playing out that script. He does not want to inject himself into the election. His term overlaps, so he has to be able to work with Romney if he should win. So Ben is in a box, that is why he has to be vague.
Cullen, a few noted economists including the Economist magazine in the latest issue, have come out with a suggestion that the Fed and BOE might want to actually target a higher rate of inflation say 3%, albeit temporarily and only with an aim of bringing unemployment down to 7% or below.
What do you think such a move would do – where the Fed explicitly states they are targeting 3% inflation or more, and thus raise everyone’s inflation expectations, cause a huge bond selling, and an equity rally?
Bernanke continues to shrewdly show a little leg, keeping the market up. That’s all it really takes until a major downturn at which point he will still have his ammunition.
When it comes to Europe, it would be incredibly brazen for Bernanke to presume to tell them how to resolve their issues. He also recognizes that the cure may be worse than the disease for the US. He and Europe have got to continue to fake it until you can make it.
Bernanke knows better than anyone that interest rates aren’t going to go up. He’s just using a little spin to intimidate the idiots into action.