What Ben Bernanke's Speech Said, and What It Failed to Say

Unemployment is too high, inflation is too low, and we're ready to open the monetary hoses again to flood a dry economy with more easy money. There, in a sentence, is the best summation I can manage of Fed Chair Ben Bernanke's big speech today.

For the first time, Bernanke made it clear that he is seriously considering a second round of "quantitative easing" to bring down interest rates and make it easier for families and companies to borrow money. The surest way to cure an economy of low inflation is to re-inflate with lower interest rates. Lower interest rates means cheaper access to capital, which means more capital, which means more investing and spending, which means more money chasing after goods and services, which means higher inflation.

But, short-term interest rates can't go any lower. They're already kissing the floor. So the Federal Reserve has to get creative if it wants to chase higher inflation. How the Fed does this -- for example, by buying U.S. debt or targeting higher inflation -- is important, and complicated, as my colleague Dan Indiviglio explains. But what does it mean for real people in the economy?

Let's say the Fed acts, and interest rates fall. This will make it cheaper for aspiring homeowners to buy or current homeowners to refinance. It will also make it easier for companies to borrow money to pay for new factories, new workers, and higher wages.

Here's the rub. As Daniel Gross explains, there's no guarantee that low rates will cure what's ailing us. Home sales are already slumping with record low mortgage rates. What makes us think lower borrowing rates will encourage debt-bitten families to take on more debt? Similarly, cheaper access to capital won't stir companies who still don't see adequate demand for their goods and services. If they do expand, they might choose to invest overseas, where developing countries with lower wages are growing much faster than the United States.

The upshot is this: The Federal Reserve's has exhausted its traditional inflation-boosting strategy (cut interest rates, and then cut them again), and the options it has left are sketchy. That's not a reason not to try. But it's a reason to be cautious about our optimism or certainty that the options will work.

That's one reason why I'm disappointed the speech didn't mention fiscal policy. I appreciate the invisible wall between fiscal and monetary policy. The President doesn't tell voters he'd like to see more asset purchases. The Fed chair doesn't call for specific stimulus. But why? The President doesn't mention monetary policy because he's not a monetary policy expert. But Ben Bernanke is a renowned economist with one of the most significant speaking platforms in the world. Wouldn't you like to know if he thinks we should eliminate payroll taxes, pass another stimulus, bail out state pensions, or do absolutely nothing? I would.