Ben Bernanke's announcement Thursday that the Fed would keep easing money sent the stock market soaring, but more important was his declaration that there is only so much the Federal Reserve can do.
The Fed's latest move, approved by the policy-setting Open Market Committee, will buy a total of $85 billion in bonds every month, including $40 billion per month of mortgage-backed securities. This pumps vast sums into the economy. It is the equivalent of printing money. Bernanke's hope is to drive down interest rates generally, especially on home mortgages.
The Fed will also extend its policy further into the future and keep interest rates close to zero through 2015. But as Bernanke himself put it, monetary policy alone can't fix what's broken. The more important tool in a severely depressed economy is fiscal policy. And here is where Bernanke is truly playing against type.
The usual script calls for a Fed chair to demand fiscal tightening in exchange for liberal interest-rate policy. It's what Alan Greenspan did in his 1993 deal with Bill Clinton. But Bernanke refuses to play that role. At a high-profile speech at the Fed's Jackson Hole conference August 31, the Fed chair warned against too much fiscal tightening. He has refused to be the instrument of the party of deficit hawks.
Bernanke has also irritated conservatives by calling for the Obama administration and Congress to do more to fix the mortgage mess. Very low interest-rate mortgages are great for those who can get them. But the tens of millions of American homeowners whose houses are worth less than the current mortgages on them can't qualify. A proliferation of small-bore programs that are voluntary to bankers, such as HAMP and HARP, has made only a small dent in the problem because serious reduction of principal owed is mostly unavailable.
In dealing with the crisis, Bernanke is a very different sort of central banker than his European counterpart, Mario Draghi. Last week, Draghi also cheered financial markets by declaring that the European Central Bank would buy unlimited quantities of government bonds, as necessary, to prevent a collapse of the euro. But he then completely undercut the benefits of that policy by insisting that any nation participating in such bond purchases must submit to an austerity program.
Draghi is nominally independent, but in practice he can only go as far as Germany's Iron Chancellor, Angela Merkel permits. Bernanke, by contrast, is genuinely independent and reports only to the Open Market Committee, which backed his latest decision by a vote of 11 to 1.
The deficit hawks have tried to enlist Bernanke, but he isn't playing and there is no counterpart of Chancellor Merkel to demand fiscal quid pro quos. The latest caper of Pete Peterson, Erskine Bowles, and company is a $50 million to $100 million corporate-funded campaign led by JPMorgan's Jamie Dimon and 100 corporate CEOs pressuring for a grand bargain to cut the deficit.
There is no such high-powered committee lobbying for more government spending, which is what the economy needs. Bernanke can hint at that with metaphors like the "fiscal cliff" but won't quite say it. Imagine if he did!
The last thing the country needs is corporate America dictating a perverse recovery policy. Jamie Dimon and his friends have already done quite enough, thank you.
In a recent piece in The New York Review of Books, Jacob Hacker and Paul Pierson cite a fascinating poll done by political scientist Larry Bartels and colleagues showing that the wealthiest Americans put deficit reduction and tax cuts ahead of jobs, while most Americans put jobs first. We already knew that, but this is research confirmation by respected political scientists.
It is a mark of just how far the country has moved to the right that the most effective voice for a strong recovery policy today is the chair of the Federal Reserve, a person first appointed by George W. Bush, and a professed admirer of Milton Friedman, as well as someone whose role usually requires him to be the most inflation-phobic person in the room.
But Bernanke evidently has a learning curve. Would that other leaders did.
