Bernanke: The Debt Ceiling Debate Nearly Broke the Recovery

Federal Reserve Chairman Ben Bernanke said the debt ceiling debate on Capitol Hill "disrupted" the economy, and he called the broken political process the greatest economic challenge we face.

In a widely anticipated speech at Jackson Hole, the steward of U.S. monetary policy did not offer promises for new quantitative easing. Nor did he demand higher spending or tax stimulus from Washington. In the tradition of Fed speeches, today's address was bone-dry and painted with the broadest of strokes. The word "term" (as in long- or short-) appeared no less than 34 times.

But with those reduced expectations for high-octane rhetoric, this is as direct as you'll hear a Fed chair thwack Washington:

Finally, and perhaps most challenging, the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.

Shorter Bernanke: Get your act together, guys.

Reactions fell into two camps. One side focused on what they didn't hear: Promises to help the economy. The other side focused on what they did hear: Vague, ambiguous ("Fed-ish") promises to not rule out further assistance.

The key clue worth highlighting in your memory is this, from near the end of the address. "The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus," Bernanke said. "We will continue to consider those and other pertinent issues, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion." (My emphasis.)

There is a really good case to be made for a third round of quantitative easing. The Fed's double mandate is stable prices and stable employment. Inflation is low and unemployment is high. That suggests the Fed is only doing half its job. Expanding the money supply would theoretically increase investment and grow demand.

The problem is that quantitative easing is only half-effective, or hardly effective, in an environment of awful family budgets and sharply contracting total government. In a "balance sheet recession" where a fifth of families are in negative equity homes, consumers are looking to pay off debt, not add debt. They need income, not low interest rates. In this economy, monetary policy depends on congressional fiscal policy to be effective.

Bernanke won't call on Congress to pass a stimulus bill, in so many words. But he can call on Congress to not go out of its way to wreck the recovery. This morning in Jackson Hole, that's pretty much exactly what he did.