Why Did Bernanke Say What He Said?

As you know, I’ve been following the ongoing debate over the extent to which markets are nervous about American government debt levels, which may or may not betoken inflation to come and/or a crowding out of private investment and/or a dollar run. Martin Wolf has a relatively new column up which, in my view, levels the arguments of those like Niall Ferguson and John Taylor, who see disaster at the doorstep. As Wolf says, there is very little in interest rates to indicate a fear of runaway inflation or a crowding out of private investment.

Ben Bernanke presented testimony this morning in which he seconded some of Wolf’s points — most notably, he suggested that slack in the system would persist for some time, making near-term inflation extremely unlikely. But he also attributed the recent rise in long-term Treasury to concern over deficits, at least in part. And, he had this to say:

Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate. Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs. The recent projections from the Social Security and Medicare trustees show that, in the absence of programmatic changes, Social Security and Medicare outlays will together increase from about 8-1/2 percent of GDP today to 10 percent by 2020 and 12-1/2 percent by 2030. With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands.

Addressing the country’s fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability–defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth–requires that spending and budget deficits be well controlled.

I’m not quite sure how to interpret this. On the one hand, it seems clear that reduced debt levels would make his life easier, and politically speaking, it will be difficult (in my view) to pass additional deficit-funded measures in the short-term without identifying some clear new revenue stream to be tapped to eventually pay for the program. On the other hand, Bernanke sure does seem to be making his policy preferences known in ways I don’t much like. This testimony will be ammunition for the Fergusons out there, who have failed to find much support in bond markets. If it seems clear that current deficits aren’t excessively inflationary and aren’t crowding out private investment, and new stimulus — in the form of unemployment benefit extensions, say — is deemed necessary to prevent the economy from tipping once more into a rapid rate of decline, then I’d like the government to have a free hand to do what needs to be done. Instead, we’ll have a bunch of blue dogs out there waving the text above.

The bottom line is this — the issue of long-run budget sustainability is actually of crucial importance. It should be part of the ongoing policy conversation. It should not be the beginning and end of the conversation, given the broader problem of economic weakness. But that’s increasingly the way these discussions are playing out. Bernanke must have known that his take on deficits would be splashed across news sites everywhere, reinforcing a meme that’s been pushed by conservatives in recent weeks. He must have known that his advisement that debt levels could be a major problem in the future would be interpreted by the press as a belief that debt levels are a major problem right now.

For someone with his background, and his awareness of the history of the Great Depression, I find this to be a very confusing and unfortunate move.

Comments

[user396040:]

Bernanke said this because he believes it. We have to have the discipline to run surpluses in boom years so that we can afford to run deficits in bust years. Republicans will have to learn that "tax" is not a dirty word; Democrats will have to learn that spending cuts are not anathema. Voters will have to become responsible. We are in the midst of a great experiment - can a democracy preserve the value of its non-metallic currency in the face of a constant temptation to compromise by spending more, taxing less, and printing more and more money. Having said this, I acknowledge that in the short term the economy needs a giant stimulus - this is the very reason we should have been running a surplus during the boom years.

Jun 03 04:19 PM

[Swashbuckler:]

With Nancy Pelosi, Chris Dodd, and Barney Franks in major leadership roles for the Dems for the past few years, you are opening a nasty can of worms when you bash the Republicans only. Newsflash----Both parties suck.


On Jun 03 03:19 PM VennData wrote:

> Clinton balanced the budget, with basically the same group in Congress.
> It can be done again.
>
> If you stop people like Reagan's Fed chairman, Greenspan, from claiming
> that ending the US gov't debt market is a bad thing., Cheney from
> saying deficits don't matter, and tax policies that are divorced
> from spending, we'll be fine.

Jun 03 04:42 PM

[jhartz:]

Retirement, and the so called entitlements of retirement will ultimately be the sacrifice made to buy additional time to work our way out of the economic morass we are in.

Eliminate retirement, Social Security benefits, and the MediCare health program.

Create a new class struggle between aging seniors and their children and grandchildren. This country can become like a pack of dogs fighting each other to see who will ultimately get the little bit of meat left on the economic bone.

Hopefully, when the Chinese take over the world, things will be set back to rights. Aren't the Chinese supposed to venerate their elders? See? It will all work out for the best soon anyway.

Jun 03 05:04 PM

[nobby73:]

Very well put. It is about the constant temptation for politicians to fiddle with it - vanity projects such as bridges, airports and shiny new toys for the military, vote buying by promising benefits for government employees, tax cuts here and there, especially prior to elections. The politicians have no qualms about handing out the goodies, because it is not their money - it is the people's.


On Jun 03 04:19 PM user396040 wrote:

We are in the midst of a great experiment - can a democracy preserve the value of its non-metallic currency in the face of a constant temptation to compromise by spending more, taxing less, and printing more and more money.

Jun 03 05:26 PM

[Fighting Yoda:]

I think the Republican Congress and Democratic president both worked to balance the budget, though I will give larger credit to Clinton and his pay-as-you-go policies. The Congress will not let Clinton spend; remember the blackouts and shutdowns in DC?

I think that was we need again - President and Congress from opposite parties.



On Jun 03 03:27 PM pslater wrote:

> Bull, the first Republican Congress since WWII balanced the budget.
> The first thing Clinton did upon his inauguration was raise taxes.
> This led to the Republican sweep of both houses of Congress in 1994.
> Clinton most assuredly did NOT balance the budget.
>
> <Clinton balanced the budget, with basically the same group in Congress.
> It can be done again.>

Jun 03 05:44 PM

[Freedom Fan:]

The inflation vs. deflation debate is only confusing if you equate dollar bills with wealth. The government and its go-fer, the Fed, cannot create wealth, but it can easily create dollar bills, which it is doing daily by the truckloads.

For a time, people can be fooled into believing that dollar bills are wealth. But Bernanke hears the laughter of the Chinese, and sees the bond market start to demand higher interest rates, and realizes that he is rapidly running out of suckers, so he is trying to insulate himself from the rapidly approaching tsunami of U.S. currency collapse and squalor which may persist for a generation.

To believe that hyperinflation is impossible is to believe that politicians only have the best interests of the people at heart. One needs only look at the intractable out-of-control spending by the California legislature, or the demands by the UAW even as they face bankruptcy, to realize that Liberals will never reign in spending until we are all insolvent like Zimbawe.

If you believe that merely by printing money we can rescue the economy, then you were not paying attention when the stagflation of the 1970s discredited Keynesian economics "forever".

Prosperity is created by the private sector when encouraged to produce real wealth and manufacture products suitable for export. But King Obama is not trying to create prosperity, he is doing his utmost to destroy wealth and punish its producers. He welcomes the economic crisis as an opportunity to "save" us with eternal dependence upon big government, run by corrupt Chicago machine politicians, eagerly supported by Keynesian "economists" like Paul Krugman and Marxist tools like Keith Olbermann.

Our current out-of-control spending is not being done to fix the economy. Rather, it is a remarkably swift and brutal implementation of the Cloward-Piven strategy to buy votes and power and replace the free market system in the U.S. with socialism.

That is why massive spending will continue long after the destructive end game is apparent to even the dimmest bulbs among us.

So Bernanke soon will step down, honor intact, and let Summers take the hit in the history textbooks.

Jun 03 05:52 PM

[Rollerball:]

BB is just the local spokesman for WB, llc. / IMF, llc. / BIS, llc. Don't hate the messenger (even if he's keen to the agenda). Granted Congress wouldn't know a banjo from Tiny Tim's ukulele, but China knows what a HAARP is. It belongs to the most powerful mercenary force this world has ever seen. And you can take that to the bank.

Jun 03 06:16 PM

[aa44aa:]

Bernanke was trying to say something just to calm the Chinese government, he was acting like he knew what problems this nation is facing. Nothing else, it was all bullshit.

Jun 03 06:43 PM

[User 347440:]

Clinton had a republican lead congress. Do some research before you post. I guarantee IT WILL NOT BE DONE with a democratic president and a democratic congress.


On Jun 03 03:19 PM VennData wrote:

> Clinton balanced the budget, with basically the same group in Congress.
> It can be done again.
>
> If you stop people like Reagan's Fed chairman, Greenspan, from claiming
> that ending the US gov't debt market is a bad thing., Cheney from
> saying deficits don't matter, and tax policies that are divorced
> from spending, we'll be fine.

Jun 03 07:13 PM

[Moon Kil Woong:]

"If it seems clear that current deficits aren’t excessively inflationary and aren’t crowding out private investment, and new stimulus — in the form of unemployment benefit extensions, say — is deemed necessary to prevent the economy from tipping once more into a rapid rate of decline, then I’d like the government to have a free hand to do what needs to be done. Instead, we’ll have a bunch of blue dogs out there waving the text above."

On trhe contrary to what the author implies, I think it is fairly clear that the current QE and deficits are inflationary and that further entitlements are not the issue as much as a public dole to inefficient, mismanaged, and bankrupt entities financial (Citicorp, et. al) and non financial (AIG, GM, etc). These are not entitlements, nor do they particularly help the public save protect the people from panicking from realizing that some compannies have successfully run the best, most efficient economy in the world into the ground in just 10 years. I think after trillions of dollars in spending and Fed backing, the public is already aware of this bitter fact. Thus, their actions are not that beneficial to the public which ends up giving away billions every few months.

We are not waiving textbooks. We are pointing out the fact that this is not leading to socialism as much as it's leading to corruption and now the decimation of all American's wealth and prosperity through the mechanics of inflation. Bernake is right in the fact that long term corruption leads to instability. Unfortunately, he has been a central contributor to this.

Jun 03 11:59 PM

[JPPennypacker:]

Money is as Money does. It sounds as though giving away all those billions hasn't done as much as most would have hoped. I am sure there is an opportunity cost here and that the money spent on many of these adventures (financial, political and military) could have done much more if they had been spent more wisely. Time will tell as it always does. Interesting comment Moon. Thank you.

Jun 04 12:08 AM

[davidbdc:]

Not sure what is confusing and concerning about facing into the realities of the future.

We need more leaders bringing up this subject and shaping debate on what needs to happen. We either raise taxes to pay for all this nonsense, or we tell people the truth....that there is no free lunch and you need to delay your retirement and keep yourself healthy. The first one (social security) is the easy one - its a math problem. People live longer than when SS was introduced and now they need to work longer. Lets just pick a number and enact. Health care for the elderly is the more emotional subject and the debate is really on the value of the government funding the prolonging of life....its easy to find "human suffering stories" and that makes this a more difficult policy to enact - but we have to do something. No more spending on big $ health care for an individual late in life.

Tough choices, including raising taxes to get rid of the deficit we have, are here and I'm glad someone is at least raising them along with the potential issues that will exist if we don't make any choices and just keep pretending.

Jun 04 01:09 AM

[Peter Cooper:]

You can see a period coming shortly when neither bonds nor equities are a very desirable investment class - as well as property - and if inflation or deflation is a concern then precious metals are the safe haven that will grow exponentially in popularity. Silver or gold junior stocks look the best option, see:
arabianmoney.net/2009/.../

Jun 04 01:49 AM

[Eagle-Chief:]

Translation of Bernanke's words:

"We're in trouble. BIG TROUBLE. Make that Deep Doo-Doo ! As far as getting any benefits in old age (Social Security, Medicare) - screww the elderly who have worked their entire lives and contributed money to these corrupt entities. Your government would rather spend TRILLIONS in Iraq, Afghanistan, Pakistan, and maybe even Iran. Your government must provide healthcare and education to 100 million illegal immigrants that we have allowed to flood your country. WE ARE UP TO OUR EYEBALLS IN DEBT AND IT'S GONNA GO "BOOM" ONE OF THESE DAYS." - interpretation of Big Ben ( brother of Tiny Tim).

It's scary thinking what our OUT OF CONTROL GOVERNMENT may do - talks are big of a federal sales tax (V.A.T. in some countries - "value added tax"). I say that if the U.S. initiates a
federal sales tax it should be called the R.O.T. (rip off tax).
Health care rationing - it's coming !!! Obama is now saying we have to do health care reform "now or never." A major national insurer was recently suggesting "reducing hospital visits" by the elderly. Here's the nauseating link......
www.msnbc.msn.com/id/3.../

Jun 04 04:10 AM

[jgbooker:]

Exactly!


On Jun 03 03:55 PM CuriousMonkey5 wrote:

> Clinton only balanced the budget by happening to be in office during a time of windfall tax proceeds from the tech/stock boom, and cranking up tax rates to capture even more of that fortuitous windfall. The times made the man, in his case.

Jun 04 07:31 AM

[Maxe Paul:]

If we go back to 2002 when the initial plans and actions for a depression were highlighted by Bernanke www.federalreserve.gov... (quite scary realy to think this was all planned ahead), we can see that Bernanke has used (nearly) all the tools in this speech from the 2002 federal reserve paper.

For me the most telling tools were, the free money, ie "helicopter Ben", which was based on the theory by Keynes, quote "Keynes, however, once semi-seriously proposed, as an anti-deflationary measure, that the government fill bottles with currency and bury them in mine shafts to be dug up by the public"

This has of course been used by giving money to useless banks and corporations such as GM., instead of the people.

This leads me to the only tool that has not been used, or more to the point, the most misunderstood tool that is yet to be fully utilised.

This is the quote,

"By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

Now examining this verse the most telling comment here is the phrase "even by credibly threatening to do so" which is referring to the fact that Bernanke may be saying he is ramping up the printing presses but in effect he is not.

I believe this to be the single most important weapon in the feds arsenal, and would certainly be key to keeping China onside. To be the ultimate puppet master, Bernanke is telling us we are printing money to cause long term inflation, but in effect it is unwaranted.

At some point in the near future i believe the cat will be let out of the bag, part of the QE roll back. I would pay close attention to any signs of this in future speeches.

Jun 04 08:22 AM

[rdd:]

The elephant in living room that nobody wants to talk about in Washington is the US deficit in 2011 and beyond. I don't believe heartburn is widespread about 1 or 2 years of deficit spending like we have this year. The problem is that nobody believes that the drunken sailors in Congress will be able to stop spending once the special interest groups realize that reducing deficits means reducing their take.

I think that everyone is waiting with bated breath to see if Congress will do something monumentally stupid like backstop California's even more wild profligacy. If that occurred, Bernanke would completely lose his grasp on the 10-yr T-bond balloon string as the markets for long-term Treasuries would collapse. He would then have to watch the housing market really collapse.

In addition, I think Bernanke wants to be able to keep relatively low Fed Funds rates to do Greenspan-like finetuning of the economy. To do that, he can't have Congress reflating an expanding economy with massive deficits because Helicopter Ben would then have to morph into his Mr. Hyde Volcker personality.

Jun 04 10:18 AM

[coreopsis:]

Comments fall short of the mark. The psychology of democracy -- that's the issue. Running for office in the US is not the opportunity for statesmanship -- it is the appeal to the vainglorious, the insecure but wealthy, and the demented. We as a whole are quite contented with the system, we have many delightful distractions: major league sports (the gladiatorial combat of our times), People magazine, guns, and, accordingly, easy access to the ER of our local hospital. Is there a BMI (body mass index) for the mind? We'd score very high indeed.


On Jun 03 05:26 PM nobby73 wrote:

> Very well put. It is about the constant temptation for politicians
> to fiddle with it - vanity projects such as bridges

Jun 04 10:40 AM

[MarkitWacha:]

Congressman Paul Ryan from Wisconsin knows and understands. I watched his testimony with the CBO director.

Bond vigilantes (myself included) are unhappy with a mostly unresponsive Congress that doesn't represent their interests. They've started a distinct trend in the 30-yr bond that will cause intelligent people to stay out or even short it.


On Jun 03 03:08 PM SW Richmond wrote:

> "I’m not quite sure how to interpret this."
>
> I can help you. The ability of the large players to manipulate currency
> and bond markets via interest rate swaps and CDS is waning. Bernanke
> is feeling the pressure on the Treasury market; this pressure threatens
> his efforts to lower long rates via QE. If long-term fiscal sustainability
> is not forthcoming, bond buyers will abandon Treasury auctions completely,
> then either Treasury rates will spike much higher or Ben will find
> himself the only bidder at Treasury auctions, the dollar will tank,
> and the nascent "green shoots" will die and be eaten by crows.<br/>
>
> When this happens, the economy returns to its rapid downward path.
> Tax revenues continue to plummet, and actual insolvency looms large
> for states, municipalities, and even Uncle Sugar.
>
> Since "fiscal sustainability" in DC is an impossibility, this is
> the path we are on. Ben knows it. The Chinese know it. Even little
> Timmy knows it. The Congress is probably too stupid to know it.
> Since Obama's only skill is reading from the teleprompter I am not
> sure if he knows anything at all other than how to read.

Jun 04 02:25 PM

[Valley Boy:]

Clinton was fortunate to preside during that time of what was
known as the Peace Dividend. That was the opportunity to reduce
the defense budget brought about by the end of the Cold War.
The Federal Reserve in Clinton's time was accomodating an economic recovery with reasonably priced interest rates. And, as previous posters mentioned, the opposition party was strong enough in those times to provide some adult supervision over the federal budget.

On Jun 03 03:55 PM CuriousMonkey5 wrote:

> Clinton only balanced the budget by happening to be in office during
> a time of windfall tax proceeds from the tech/stock boom, and cranking
> up tax rates to capture even more of that fortuitous windfall. The
> times made the man, in his case.

Jun 04 03:16 PM