In his much anticipated speech in Jackson Hole, Wyo., on Friday, Federal Reserve Chairman Ben Bernanke may not have provided the financial markets with the kind of details they sought on what new steps he would do to breathe more life into the economy.
But he definitely gave President Obama something to hang onto. He also gave congressional Republicans some support for their position. In short, he tried to strike a Solomon-like balance.
Not that it will likely matter much, given how in the partisan warfare, both Republicans and Democrats tend to take from Bernanke what helps them make their ideological case and discard the rest.
Still, what he said is worth noting because not only is Bernanke the nation's top central banker, but also as an economist one area of his scholarly expertise has been the Great Depression.
So what did Bernanke say? He issued a warning about cutting government spending too greatly in the near term, which could kick the already wobbly legs out from under the economy. Score one for Democrats.
But he also said policymakers must put the nation onto a stable fiscal path or come to rue the consequences. Score one for Republicans.
However, his explanation for how the economy got into its current mess didn't put the onus of blame on the Obama administration. So maybe, the speech gave Obama more than it gave Republicans.
First the warning that helped Republicans. It came after a section of the speech in which Bernanke repeated past statements that the nation's deficits and debt are unsustainable. Entitlements must be addressed, he said, though not in those words:
To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage. The increasing fiscal burden that will be associated with the aging of the population and the ongoing rise in the costs of health care make prompt and decisive action in this area all the more critical.
But reducing the government spending that now supports a weak economy is a bad idea. It could make a bad situation worse, especially if that makes lowering the employment rate in the near term more difficult:
Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery.
At an earlier point in the speech, Bernanke made a statement that seemed to make the case for the jobs plan Obama plans to make shortly after Labor Day. Whatever will significantly increase hiring in the short-term will actually improve the long-term fiscal outlook, Bernanke said, urging Congress not to see the link.
Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view—the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well.
As Bernanke indicated, he has said similar things before. But coming a few weeks before Congress is scheduled to return from its recess and before the deficit-cutting supercommittee starts meeting, his comments had a new urgency.
Then Bernanke struck a note of balance:
Fortunately, the two goals of achieving fiscal sustainability—which is the result of responsible policies set in place for the longer term—and avoiding the creation of fiscal headwinds for the current recovery are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the longer term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives.
When it came to why the effects of the Great Recession have persisted, however, Bernanke's explanation sounded nothing like those that come from Republican presidential candidates and congressional Republicans.
He didn't cite Obama administration regulations or uncertainties from the enactment of the Affordable Care Act or concerns about higher taxes.
Instead, he blamed the fallout from the housing sector's implosion which has essentially infected the entire economy:
... Unfortunately, the recession, besides being extraordinarily severe as well as global in scope, was also unusual in being associated with both a very deep slump in the housing market and a historic financial crisis. These two features of the downturn, individually and in combination, have acted to slow the natural recovery process.
Notably, the housing sector has been a significant driver of recovery from most recessions in the United States since World War II, but this time—with an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines—the rate of new home construction has remained at less than one-third of its pre-crisis level.
The low level of construction has implications not only for builders but for providers of a wide range of goods and services related to housing and homebuilding. Moreover, even as tight credit for some borrowers has been one of the factors restraining housing recovery, the weakness of the housing sector has in turn had adverse effects on financial markets and on the flow of credit.
For example, the sharp declines in house prices in some areas have left many homeowners "underwater" on their mortgages, creating financial hardship for households and, through their effects on rates of mortgage delinquency and default, stress for financial institutions as well. Financial pressures on financial institutions and households have contributed, in turn, to greater caution in the extension of credit and to slower growth in consumer spending.
Again, it's interesting to note how his explanation of the current crisis differs from the critique of Obama's policies by the Republican presidential candidates, lawmakers and some business leaders.
Bernanke isn't all knowing, of course. He's been wrong before. He missed the danger the collapse of the subprime mortgages to the larger financial sector and economy. Like other policymakers, he also didn't see the greater calamity that would ensue from allowing Lehman Brothers to fail.
But, being that his expertise is on economic downturns, his explanation of what happened and why the economy continues to struggle deserves attention, even if it doesn't match the argument made by those on one side of the ideological spectrum.