Ben Bernanke is the soul of discretion. That was evident in his Thursday speech to the Economic Club of Minnesota in which he disclosed no new information and gave no hint about the Fed’s future course. However, such tactful reticence was to be expected for at least two reasons.
First, in central banking as in diplomacy, it is more important to be discreet than to be intelligent. Luckily, Bernanke is both, because we are in the middle of the worst economic bind in 80 years. Any careless remark or misstatement by the Fed chair could throw already-nervous financial markets for a loop.
Second, Bernanke must be careful of what he says because his power as Fed chair is much smaller than people realize. Yes, he does chair the seven-member Board of Governors. (The Board currently has only five members because of two positions that remain unfilled due to Senate resistance to Obama appointees.) And yes, he does chair the Fed’s key policy-making body, the Federal Open-Market Committee, that meets eight times a year, with the next meeting scheduled for Sept. 20-21.
However, while the chair of these two bodies is more than “first among equals,” he is not a dictator. To implement whatever initiatives he thinks necessary, he must convince a large majority of either group to support them. That isn’t always easy, particularly in FOMC meetings in which all 12 presidents of the Federal Reserve district banks participate and in which five of them vote on an annual rotation basis. (Minneapolis Fed President Narayana Kocherlakota is voting this year.)
These district presidents are not chosen by Bernanke and don’t answer to him. They prize their independence and often have more formal education in economics than do many Fed governors. And, at least in the past two decades, they tend to be more wary of inflation than do the governors, who are appointed by presidents to terms that, in theory, last 14 years.
Ben Bernanke can go out and say whatever he wants about the economy or Fed policy. But if more than a few FOMC members strongly disagree, Bernanke’s proposals will die in the committee and he will appear impotent to the world. So of course he was careful in what he said in his Minneapolis speech just as he is in all his other talks.
But while he was discreet, some of his personal views do come through. He does not view inflation as an imminent threat. That is the point of contention with the three FOMC members who went on record as dissenting from the bland statement issued after the August meeting. The only change it included was a more explicit commitment to the Fed keeping interest rates low for a specified period stretching into 2013.
Bernanke argued that underlying inflation remains low and that the increases in fuel and food prices seen earlier in the year appear to be easing. He also argued that because there is little upward movement in wages, even before adjustment for inflation, and because labor productivity is rising just as fast, rising wages and salaries are not going to play a factor in inflation as they did in the great inflation of the 1970s.
Kocherlakota, one of the three August dissenters, obviously doesn’t see it quite that way and has reiterated that disagreement in his own tactful recent speeches.
In response to a pre-vetted question from one of the Economic Club’s organizers about disagreement on the FOMC, Bernanke emphasized the positive. “That’s why it is a committee,” he said, lauding the fact that 19 people bring different views to each meeting and that considering a range of views leads to better policy. This is all true and all good, but the underlying fact remains that there are greater divisions on this key policy body than at any nearly time in recent decades.
The chairman also said, although not in so many words, that while Congress and the president should balance the Federal budget in the long run, they should not cut spending or raise taxes right now. That is what most economists would say, certainly any who are Keynesians. One hears again and again from such economists that we need continued fiscal stimulus right now, while the economy is weak and unemployment high, but that we also need a credible bipartisan commitment to balanced budgets in the future.
I am one of many who basically agree with that. But it also seems apparent that achieving this is impossible. The bipartisan demagoguery we have had on fiscal issues over the past 30 years means there is no way to achieve a “deficits now, balance later” agreement that would be credible to anyone anywhere in the world.
And that is precisely why we are in such deep trouble. Bernanke ended his speech by reciting many reasons the U.S. economy can be strong over the long term. We have hard-working, well-educated workers, good capital markets, great universities, a high level of research and development and so on.
All this is true. And it is also true that, in the course of history, other nations with strong fundamentals threw away such advantages when political deadlocks resulted in self-sabotaging policies. Bernanke tacitly recognized this in saying “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the financial crisis and the recession if – and I stress if – our country takes the necessary steps to secure that outcome.”
Recent events make me doubt that we will take those necessary steps. And that would mean we would throw away prosperity for the better part of a generation.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.