Bernanke Chastises Congress Over Deficit

By Daniel Indiviglio

The Federal Reserve rarely comments on fiscal policy. Instead, it tries to keep its distance from politics. But in a speech Monday evening Fed Chair Ben Bernanke revealed his stance on Congress' runaway spending: he doesn't like it. His comments provide insight into the course he believes Congress should be on and how the Fed could help.

The Deficit Matters, But Not Now

The speech was almost entirely about the deficit. He explained that it has been entirely too high in recent years. He goes through various ways that Congress could act to begin to reduce it, and says it's very important they do so -- but not now. Here's the money quote:

Economic conditions provide little scope for reducing deficits significantly further over the next year or two; indeed, premature fiscal tightening could put the recovery at risk. Over the medium- and long-term, however, the story is quite different.

It's pretty clear form this that Bernanke isn't actually calling for deficit cuts for the next year or two. Instead, he wants an aggressive plan for deficit reduction in place for when the recovery is on more stable footing.

Did He Just Say to Extend the Bush Tax Cuts for Everyone?

But wait a second. Bernanke just said that deficit reduction measures over the next two years "could put the recovery at risk." That means he would worry about any means for deficit cutting in the short term. Although he didn't come out and say it, this appears to indicate that Bernanke would support a temporary extension of the Bush tax cuts -- for everyone.

Anyone who complains about the $70 billion annual cost for extending those cuts to the rich would be missing Bernanke's point. He thinks efforts to save the government some money over the next year or two are dangerous. Thus, a temporary extension would be more prudent than allowing the cuts to expire at the end of this year.

Let the Fed Handle It

Yet, Bernanke also didn't explicitly call for additional fiscal stimulus. Instead, he said the government shouldn't tighten fiscal policy over the next year or two. So what can be done to provide some additional fuel to the recovery? After his speech, responding to a question, Bernanke suggests that he would support additional quantitative easing through asset purchases. Scott Lanman and Joshua Zumbrun from Bloomberg report him saying:

"I do think that the additional purchases -- although we don't have precise numbers for how big the effects are -- I do think they have the ability to ease financial conditions," Bernanke said in response to questions in Providence, Rhode Island, at a forum with college students. He said the first wave that ended in March was an "effective program."

Now this doesn't mean QE2 is a sure thing. That will depend more on how the economy fares over the next few months. But it's pretty clear from this statement that Bernanke is ready to act.

In fact, if you take this in context with his deficit worries, it appears that he would prefer expanding the monetary base to more spending on the fiscal side. He likely believes it will be easier for the Fed to exit aggressive monetary policy than for Congress to close the deficit. Considering how large the Fed's balance sheet has already grown since the financial crisis, let's hope he's right.

This article available online at:

http://www.theatlantic.com/business/archive/2010/10/bernanke-chastises-congress-over-deficit/64084/