Bernanke, Heal Thyself!

Wednesday’s Washington Post reported:

Federal Reserve Chairman Ben S. Bernanke warned Wednesday that Americans may have to accept higher taxes or changes in cherished entitlements such as Medicare and Social Security if the nation is to avoid staggering budget deficits that threaten to choke off economic growth.

“These choices are difficult, and it always seems easier to put them off — until the day they cannot be put off anymore,” Bernanke said in a speech. “But unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth.”

His stern lecture came as the economy is emerging from the worst recession in years, sending the stock market up considerably over the past year and raising public hopes for a return to prosperity. But the economic downturn — with tumbling tax revenue, aggressive stimulus spending and rising safety-net payments such as unemployment insurance — has driven already large budget deficits to their highest level relative to the economy since the end of World War II. This has fueled public concern over how long the United States can sustain its fiscal policies.

The health-care bill signed by President Obama last month has further stoked the national debate over government entitlement programs, though the non-partisan Congressional Budget Office has projected that the legislation would actually reduce future deficits.

Barely two months after Bernanke was confirmed by Congress for a second term following a bruising fight, he used his bully pulpit to tread into an area of economic policy that is usually the province of the president and Congress. He characterized the budget gap as the biggest long-term economic challenge the nation faces, even as he acknowledged that reducing the deficit immediately would be “neither practical nor advisable” given the still-weak economy.

So, Bernanke sees a big problem with the coming deficits.  His concerns might seem a bit more genuine if he didn’t follow it with a warning that it is “neither practical nor advisable” to do anything about them right now. 

Given that he wants to do nothing about this critical issue he sees, the 2009 Time Man of the Year’s criticisms may very well be designed to obfuscate the unprecedented behavior for which he’s been both praised and criticized and which, in my opinion, may have guaranteed that this economy faces many difficult, or at least very uneven years ahead. 

At the risk of being too generous, we could credit Bernanke with foresight to see the real problem that this causes him.  This fiscal time bomb will cause The Fed to have to print money to pay off these debts . . . which is just another form of taxation, in that it will decrease the value of the dollar.  But that won’t likely effect Bernanke.  It will likely impact his successor, which is why it’s too generous to give him credit for this line of thinking.  That’s because Bernanke’s real fear is being the guy who’s the cause of the next Great Depression. . . . something he wasn’t on the hook for before, but may now be given all of his market manipulations.

Let’s hope not.

So, in short:  Bernanke may be right.  In fact, he is right.  We should do something about these deficits.  But he should be focusing on disclosing his own mess and how he’s going to clean it up, instead of telling others how to clean up a theirs . . . eventually. 

After all, that’s how his predecessor helped get us into the current mess—he wanted to be Maestro of all things market, when he should just have focused on controlling the growth in U.S. money supply.

Advertisement