On Thursday, Federal Reserve Chairman Ben Bernanke went up to Capitol Hill to testify in front of the Joint Economic Committee. He faced a fairly skeptical, even hostile, audience, primarily the Republicans who think Bernanke has been doing too much to help the economy.
Rep. Kevin Brady: I wish you would look the market in the eye and say The Fed has done all it can perhaps too much. Sen. Jim DeMint: I think you'd have to agree that the activism has been unprecedented.
Bernanke was his normal, mild-mannered, calm self, largely untroubled by his interlocutors' barbs.
Sen. Dan Coats: Given the kind of fragile state - fragile world that we're looking at and particularly the situation at night as it's unfolding do you sleep well at night? Bernanke: Do I see-? Sen. Dan Coats: Do you sleep well at night? Bernanke: I generally sleep pretty well. But I have a lot to do during the day and I need to be well rested.
And he assured the members of Congress that if things get really bad, the Fed will be there to help.
"As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate," Bernanke said.
But the point is that things are already bad. And Bernanke was never asked the one question that had I been sitting up on the dais I would have liked to ask him: "Mr. Chairman: your academic research shows the necessity of central bankers taking aggressive, sometimes unprecedented action in the wake of financial crisis in order to avoid long term stagnation and economic misery. And yet, as Federal Reserve chairman you seem to be entirely ignoring your own research. The Fed refuses to take action to address the jobs crisis in this country, even as inflation stays at or below target. You are ignoring your legal mandate, ignoring your own research, ignoring the misery of millions who are unemployed for no good reason. My question for you, Mr. Chairman, is: Are you trying to get Mitt Romney elected president?"
Provocative, sure, but, worth discussing. Because we continue to have an employment crisis in this country that is engulfing the labor force in flames and rather than even attempt to put out the fire, Ben Bernanke and the Federal Reserve are content simply to sit back and watch it all burn, assuring us not to worry, if things get really bad they'll come to the rescue. Meanwhile, the entire block is going to be reduced to ash.
Of course, because we're in campaign season, most of the media focus has not been on Bernanke, but instead on the two men vying to be the next president. In the wake of the recent awful jobs report, President Obama and Mitt Romney had a back and forth this week about job creation, or lack thereof, and who is to blame for it.
The President points out that the economy has a net positive of 50,000 private sector jobs under his watch, which is impressive given the fact that he inherited an economy in the worst freefall in 70 years, losing almost 6000,000 jobs the month he was inaugurated (and, even more shockingly, contracting at a rate of 6.3%, almost twice as bad as we thought at the time based on data at the time).
Then there's the fact that Mitt Romney has his own job creation record and it's pretty embarrassing. While he was governor of Massachusetts, the state ranked 47th in job creation. And in defending that, Romney campaign adviser Eric Fehrnstrom said, "When Mitt Romney arrived, Massachusetts was an economic basket house. If you throw D.C. into the mix, we were 51 out of 51. By the time Mitt Romney left four years later, we were in the middle of the pack. We were 30th in the nation."
In other words: I inherited a very crappy situation and improved it! Don't blame me for the job losses, blame my predecessor who turned the state into a basket case. You'll note that sounds familiar. When Obama has tried to make the same argument, this has been Romney's response: "The president is always quick to find someone to blame."
None of this speaks to what can be done now. The May jobs report, along with other indicators, show an economy that's still suffering from the stress of deleveraging and inadequate demand. The Republican party knows full well that continued economic dysfunction suits their political interest, so they have literally no political incentive to make things better. Which brings us back to Bernanke and why we should start viewing his salary as an in-kind contribution to the Mitt Romney Super PAC. More than any other single individual in the country, Ben Bernanke holds the fate of the US economy in his hands, and as such he holds the fortunes of Barack Obama, the Democratic party and the legacy of liberal governance in his hands as well.
Now you will hear from some quarters, even from Mr. Bernanke himself, that there is not much the Federal Reserve can really do. The Fed's mission is macro-economic management, to steer the economy between two opposing pitfalls: high inflation on the one hand and high unemployment on the other. The tool it uses to navigate this is short-term interest rates. If inflation is getting too high, the Fed can raise rates, making it more expensive to borrow money, slowing the economy and, ultimately bringing inflation down.
On the other hand, when unemployment is high like it is now the Fed can cut interest rates, making it easier to borrow money and giving a boost to economic growth and employment.
You might notice there's a very, very important asymmetry at the heart of the Fed's approach to managing the economy. During times when inflation is stubbornly, persistently high, the Federal Reserve can keep raising rates and raising rates until the fever breaks and inflation comes down. That's precisely what Paul Volcker famously did during the 1970s. Rates went all the way up to 20%, which triggered a recession (one that more or less killed off Jimmy Carter's chances for re-election, but I digress). But what happens if you have, as we do now, persistently high unemployment? Well, you can cut rates, but unlike raising rates—which you can always do more of—after cutting rates a few times, you eventually end up at 0%, and there's nothing left to cut. This is what economists call the Zero Lower Bound.
And it just so happens that the Zero Lower Bound and how central bankers should deal with it was the subject of much of Ben Bernanke's academic research. Bernanke studied the aftermath of financial crises and came to the conclusion that when central banks neared the Zero Lower Bound, they were far too reticent and unwilling to turn to unconventional means of monetary policy. And this reticence caused a whole lot of unnecessary misery in places, like, say, Japan. Here's what he wrote about Japan's central bank's unwillingness to be more aggressive in 2000. "[Japan's] economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn't more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced."
In fact, so unconventional was Bernanke's thinking on this, and so creative, that he once famously seemed to endorse Milton Freedman's suggestion that if all else failed, a central bank could just send out helicopters to drop bags of cash on the populace in order to stir growth and bring down unemployment. This earned him the nickname Helicopter Ben.
And yet, while the Federal Reserve did take a variety of unconventional steps during the immediate crisis and its aftermath, for the last 11 months it has been content to sit on its hands, telling Congress to do more, and citing the zero lower bound as an excuse to let its own helicopters sit idle in their hangars. This goes against everything Ben Bernanke said he believed in. How can this be?
This is the great mystery stalking those who closely follow monetary policy. In fact, a friend and fellow economist of Bernanke named Larry Ball has even published a working paper entitled, and I'm paraphrasing: "Why the hell won't the Ben Bernanke of today listen to the Ben Bernanke of yesteryear?" Heck, even articles in the conservative magazine The Economist have urged Bernanke to get off his tuchus.
And while it might seem like an academic argument, a nerdy game of clue, the question of what's gotten into Ben is quite literally the single most pressing question in the entire political economy right now. Congress won't lift a finger to stimulate the economy, and the president can't do very much without it. So Bernanke is, for the next six months, the only game in town.
Many people suspect that Bernanke is letting the economy struggle not because he wants Mitt Romney elected, though let's be clear: Bernanke's a Republican, who served as economic advisor to George W. Bush, and was appointed to the Fed by Bush, but rather because he's under tremendous pressure from the Tea Party/Ron Paul wing of the Federal Reserve Board not to do anything. In fact, bullying Bernanke into quiescence has been an explicit right-wing strategy. Remember this from Texas Gov. Rick Perry?
"If this guy prints more money between now and the election, I dunno what y'all would do to him in Iowa but we would treat him pretty ugly down in Texas."
And yet, while Bernanke faces angry questions from right-wingers before Congress, Democrats are exerting no pressure. It's another kind of destructive asymmetry that will lead to prolonged unemployment and poverty for millions, not to mention the premature end of the Obama era.
So until Mr. Bernanke answers the question of whether he's trying to get Mitt Romney elected, and while there's still a chance for us to avoid another recession, I think it's time Bernanke started to feel some heat from the left.