Bernanke's Disappointing Speech at Jackson Hole (But the stock market loved it.)

Federal Reserve Chair Ben Bernanke's closely watched annual speech at this morning's session of the Fed's Jackson Hole Conference is a good illustration of why Thomas Carlyle referred to economics as the dismal science. Chairman Bernanke was doubly dismal, not just as an economic pessimist but as a political coward.

Bernanke's assessment of the economy was typically qualified with on-the-one-hand-this, on-the-other-hand-that, to reassure financial markets. But worse, it was gutless in terms of the proposed solutions to the crisis.

On the one hand, said Bernanke, manufacturing is up 15 percent, households are paying off debts, and the banking system has not gone off a cliff. On the other hand, unemployment is stuck on a plateau of over 9 percent, the housing mess is dragging down the economy, and despite low interest rates for the elite, most borrowers face tight credit conditions.

"Financial pressures on financial institutions and households have contributed, in turn, to greater caution in the extension of credit and to slower growth in consumer spending," he said.

This economic slump, he acknowledged, would be a much longer slog than usual. "Although we expect a moderate recovery to continue and indeed to strengthen over time, the [Fed's Open Market] Committee has marked down its outlook for the likely pace of growth over coming quarters." And he added,

Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow.

That means we need more drastic remedies, right?

Well, no. The government has two basic levers in an economic crisis -- fiscal and monetary policy. Bernanke echoed the usual platitudes about needing to get our fiscal house in order. He managed to articulate the need for more stimulus without endorsing it. "U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time."

That leaves monetary policy -- the Fed's own running room to be bolder. Here was the most disappointing and spineless part of Bernanke's speech.

Paul Kriugman, this morning, laid out some of the things that the Fed might do -- policies that Bernanke himself proposed as an academic writer commenting on the Japanese stagnation of two decades ago:

[P]urchases of long-term government debt (to push interest rates, and hence private borrowing costs, down); an announcement that short-term interest rates would stay near zero for an extended period, to further reduce long-term rates; an announcement that the bank was seeking moderate inflation, 'setting a target in the 3-4% range for inflation, to be maintained for a number of years,' which would encourage borrowing and discourage people from hoarding cash.

Did Bernanke propose any of this? No, he did not. The Fed had previously announced that it would keep short-term interest rates close to zero for at least another two years, but that policy has not been sufficient for the past three years. However, it was as far as Bernanke would go.

Referring to the Fed's own policies, he would only say, "The [Open Market] Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability."

That's it? That's what Fed chairs always say.

Another good idea would be for the government to take advantage of today's unusually low interest rates to refinance the public debt with longer-term bonds, to lock in low costs and reduce future interest payments. Bernanke did not opine on that either.

Straining to sound like Pollyanna, Bernanke added these words about how things would turn out fine in the long run, which of course brings to mind Keynes' epic words: In the long run, we're all dead.

Over the medium term, housing activity will stabilize and begin to grow again, if for no other reason than that ongoing population growth and household formation will ultimately demand it. Good, proactive housing policies could help speed that process. Financial markets and institutions have already made considerable progress toward normalization, and I anticipate that the financial sector will continue to adapt to ongoing reforms while still performing its vital intermediation functions. Households will continue to strengthen their balance sheets, a process that will be sped up considerably if the recovery accelerates but that will move forward in any case. Businesses will continue to invest in new capital, adopt new technologies, and build on the productivity gains of the past several years.

The stock market, idiotically, rallied on Bernanke's assurance that, on the one hand, the recession will not go on forever, and, one the other, that the Fed still gives priority to containing (nonexistent) inflation.

This economic crisis will be remembered as a time when the president, the Congress, and the Federal Reserved all dithered. Bernanke was far more concerned today with genuflecting to the conventional wisdom than fighting a deepening economic calamity.

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