Analysis: Bernanke's plea for fiscal aid goes unanswered

WASHINGTON Tue Nov 23, 2010 4:04pm EST

U.S. Chairman of the Federal Reserve Ben Bernanke delivers opening remarks at a Federal Reserve System symposium on ''Mortgage and the Future of Housing Finance'' in Arlington, Virginia, October 25, 2010. REUTERS/Jim Young

U.S. Chairman of the Federal Reserve Ben Bernanke delivers opening remarks at a Federal Reserve System symposium on ''Mortgage and the Future of Housing Finance'' in Arlington, Virginia, October 25, 2010.

Credit: Reuters/Jim Young

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WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke's unusually blunt plea for fiscal help will probably go unanswered, leaving the economy too limp to put millions of the unemployed back to work any time soon.

Nearly 15 million people are still unemployed despite 10 consecutive months of gains in private sector jobs. Economic output remains about $86 billion below where it was at the start of the recession almost three years ago.

Bernanke warned on Friday that the country is on an economic trajectory that will leave millions of people unemployed or underemployed for many years. He said there were limits to what the central bank alone could do to help.

A fiscal program that provided near-term support while addressing long-term budget deficits "would be an important complement to the policies of the Federal Reserve," he said.

It was a clear call to Congress to do its part to generate faster growth, and perhaps a tacit acknowledgment that the Fed's controversial $600 billion bond-buying program simply cannot fill the gaping economic hole.

The Fed released updated economic forecasts on Tuesday showing that officials think 2011 growth prospects looked considerably dimmer than they did in June.

They thought unemployment would be higher than previously predicted and remain elevated at least through 2013, and some thought inflation would stay too low for comfort. This would suggest some Fed officials have their doubts the bond-buying campaign alone can provide sufficient economic lift.

Bob Eisenbeis, chief monetary economist at Cumberland Advisors and a former Fed official, said fiscal policy is normally considered a "third rail" for Fed chairmen. The fact that Bernanke dared to touch it shows just how urgently he thinks the economy needs more support.

Nobel prize-winning economist Paul Krugman said there was little chance newly empowered Republicans in Congress -- who campaigned on a smaller-government platform -- would answer the call.

"My immediate thought was, why not ask for a pony, too?" Krugman wrote in his New York Times column on Monday.

Indeed, the response from Congress to the Fed's bond-buying spree has been anything but friendly and there is no indication a new crop of Republican leaders is in a spending mood.

Some Republicans have proposed stripping the Fed of its mandate to promote full employment. They have harshly criticized the program, announced just one day after they racked up big gains in the November 2 elections, as sowing the seeds of inflation.

Spending cuts, not stimulus, will top the agenda when they take control of the House of Representatives and narrow the Democrats' margin of control in the Senate in January.

Democrats have stayed quiet, well aware that they lack the backing for another big government spending program.

"It is often said that one of the functions of an independent central bank is to take the political heat when pursuing politically unpopular policies," Cumberland's Eisenbeis said. "Well, the oven is hot and the turkey is roasting."

SNEAK PREVIEW

If Bernanke is to get any help from Congress, it will probably be in the form of modest steps that preserve the status quo.

President Barack Obama's Democrats managed to pass an $814 billion stimulus package in early 2009 with only two Republican votes. A second, less costly effort failed earlier this year.

Republicans not only oppose further spending, they want to cut some $100 billion in government outlays next year. Representative Jerry Lewis of the House Appropriations Committee even proposed using the remaining unspent $12 billion from the first round of stimulus to pay down the deficit.

The first test of whether Democrats can work with Republicans could come as early as next month, when lawmakers consider whether to extend Bush-era tax cuts that will otherwise expire at the end of the year.

Democrats want to extend the tax cuts for families earning less than $250,000 per year, while Republicans would like to extend them for everyone. One possible compromise would be agreeing to extend them for everyone for one or two years.

"If Congress and the president can reach a quick compromise on taxes in early December, it will be a sign that they can work together in at least a minimal fashion, and we believe should reduce some of the psychological headwinds in the economy," said Ethan Harris, an economist with Bank of America-Merrill Lynch in New York.

"On the other hand, if they agree to disagree, we believe downside risks to U.S. growth will likely intensify," he said.

(Editing by Dan Grebler)

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Comments (5)
ElroyFromIowa wrote:
Congress can’t spend their way to better times any more than the Fed can print their way to it. The Fed and politicians could do their part by being more frugal. I can never understand politicians trying to fix things with more government. Sometimes, economies simply need to heal. Yeah, that’s painful, but the fixes we’ve seen just make it last longer.

Nov 23, 2010 12:27pm EST  --  Report as abuse
xyz2055 wrote:
Elroy..I agree, but wait till when the cuts in spending start. The whining will be unprecedented. Everyone thinks they are owed the handout they are receiving from the government. It’s the other guy that doesn’t deserve it. I’m also in favor of ending the unemployment benefits extensions. In some cases it’s keeping the unemployment data artificially high. As well as any help with home owners that can’t pay their mortgages. We’ve got to stop looking to Uncle Sam to fix our personal problems. The fixes don’t really fix any thing and in the end and just costs (wastes) more money.

Nov 23, 2010 1:11pm EST  --  Report as abuse
PCL1 wrote:
The FED has “printed” our way out of every recession since WWII. What did people think was happening each time interest rates dropped below the inflation rate? It did cause inflation when overdone, but, in those days, no one argued that the recession should just be allowed to go on forever. Bernanke has a printing press, which gives him more power to stimulate the economy than the nearly bankrupt US treasury. He should go about it effectively but quietly, preferably buying up hard commodities to get more money into circulation without making the 600 billion dollar announcements that have fueled so much hysteria. If inflation picks up, he can sell these assets off to rein it in. There in nothing new about any of this except the types of assets the FED has resorted to buying. But, most people have no understanding of monetary policy and panic when they hear talk of printing presses. Meanwhile, they’re ignoring the real problem, a complete lack of will in this country to deal with the deficit.

Nov 23, 2010 1:14pm EST  --  Report as abuse
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