Offering No Stimulus, Bernanke Looks to Government for Recovery

Address to central bankers puts onus on Washington to set policy that will drive growth

In his remarks to a conference of central bankers at Jackson Hole, Wyoming on Friday, Federal Reserve chairman Ben Bernanke offered no further financial stimulus to jolt the sluggish U.S. economy out of its stubbornly slow growth rate. But he expressed optimism that the country could regain its economic footing. He pointed to smart housing policy, financial reforms, and personal spending as drivers of economic recovery. An excerpt from his speech reads:

Notwithstanding the severe difficulties we currently face, I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if--and I stress if--our country takes the necessary steps to secure that outcome. Good, proactive housing policies could help speed that process. Financial markets and institutions have already made considerable progress toward normalization, and I anticipate that the financial sector will continue to adapt to ongoing reforms while still performing its vital intermediation functions. Households will continue to strengthen their balance sheets, a process that will be sped up considerably if the recovery accelerates but that will move forward in any case. Businesses will continue to invest in new capital, adopt new technologies, and build on the productivity gains of the past several years. I have confidence that our European colleagues fully appreciate what is at stake in the difficult issues they are now confronting and that, over time, they will take all necessary and appropriate steps to address those issues effectively and comprehensively.

As The New York Times pointed out, the speech "marked a return to the Fed’s position earlier this year that the Fed has done most of what it can, and that the rest of the government must do more." In the second-to-last paragraph of his speech, Bernanke clearly signaled that lawmakers must do more to bolster growth, and to streamline major economic decisions, like the vote on the debt ceiling earlier this month.

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. Although details would have to be negotiated, fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals. Of course, formal budget goals and mechanisms do not replace the need for fiscal policymakers to make the difficult choices that are needed to put the country's fiscal house in order, which means that public understanding of and support for the goals of fiscal policy are crucial.