Bernanke pushes for government action

Federal Reserve Board chairman Ben Bernanke wants some help saving the U.S. economy.

With global financial markets zeroed in on his annual August speech at Jackson Hole, Wyo., Mr. Bernanke made the case Friday for more fiscal stimulus, something the White House and other supporters of short-term government spending haven't been willing to push with force.

The extraordinarily high number of Americans who have been out of a job for more than six months represents a serious threat to long-term vitality in the U.S., Mr. Bernanke said, arguing that helping them and putting Washington's finances on a sustainable path are not incompatible goals.

Normally, efforts to boost economic growth in the short term can take years to produce tangible results. But this time might be an exception, the Fed chief said. Unless the long-term unemployed are soon put back to work, they risk languishing on the jobless rolls as their skills erode. Such an outcome would represent a social scar, a drag on the U.S.'s economic dynamism and a burden on the country's social safety net, he said.

That message is out of step with the current economic dialogue in Washington, which is dominated by the Republican Party's push to shrink government spending. Mr. Bernanke acknowledged the importance of restraining the country's bloated budget deficit and massive debt load over the long haul, while insisting that this is not the moment to obsess over austerity.

"Although the issue of fiscal sustainability must urgently be addressed, fiscal policy makers should not, as a consequence, disregard the fragility of the current economic recovery," Mr. Bernanke said.

The Fed chief's call for a fiscal boost comes as a consensus grows among economists that the power of monetary policy to prop up the recovery is muted, with so many consumers and businesses unwilling to borrow at any rates, and banks still wary about lending. Stimulus measures could include anything from another infrastructure program that aims to re-employ jobless construction workers and repair America's crumbling roads, bridges and schools, to cuts in personal and corporate taxes. Most leading economists say any stimulus should be paired with deficit-reduction measures that would kick in once the economy is back on track.

Financial markets gyrated most of this week as investors speculated that Mr. Bernanke would use his speech to central bankers and economists at the Kansas City Fed's yearly symposium to herald a third round of "quantitative easing," the term Wall Street assigned to the Fed's efforts to lower market interest rates by creating billions of dollars to buy financial assets.

Mr. Bernanke gave no hint that he thought further stimulus from the central bank was needed, although he did say the Fed's policy committee would meet for two days next month – Sept. 20 and 21 – instead of just one day as previously scheduled, to allow for a "fuller discussion" of the bank's options.

The extra day could prove critical. At the Fed's Aug. 9 meeting, Mr. Bernanke was able to push through a decision to pledge that U.S. borrowing costs may need to stay "exceptionally low" until mid-2013 or later. But three of the Fed's 10 regional chiefs dissented, preferring no change in language, in the biggest internal opposition since Mr. Bernanke took the reins in 2006.

The absence of any talk of what further stimulus tools the Fed might deploy had little effect on markets, since Mr. Bernanke also stressed the recovery will continue and strengthen, and because most investors had already abandoned hope of a quick return to quantitative easing, or "QE3."

Meanwhile, Mr. Bernanke's former counterparts in academia expressed relief that he was putting pressure on Congress and the White House to join the fight to keep the U.S. from sliding back into recession. His remarks came hours after the latest U.S. growth data showed the world's biggest economy expanded at a 1 per cent annual pace in the second quarter, leaving little margin for shocks in the coming months as joblessness and a weak housing market restrain the recovery.

A third asset-purchase program "would help, but it's small potatoes," Peter Diamond, the Massachusetts Institute of Technology professor who shared last year's Nobel Prize in economics, said in an interview on the sidelines of a conference in Lindau, Germany. "That's why I think it's time to focus on the fiscal side. There, we still have big guns."

Still, fiscal policy makers in both parties have become gun-shy, to say the least.

The Democratic U.S. administration says President Barack Obama is planning to unveil a new economic strategy early next month, but if the acrimonious debt-ceiling negotiations of this summer are a guide, any legislation that advances Mr. Obama's priorities faces a steep, uphill climb.

For his part, Mr. Bernanke urged Congress to avoid such spectacles, arguing that political gridlock and the downgrade of Washington's triple-A credit rating by Standard & Poor's combined with the European debt crisis to "hurt household and business confidence." Referring to the debt-ceiling negotiations specifically, Mr. Bernanke warned, "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 businesses."

The Fed chief's unusually pointed jabs were clearly designed to give some political cover for Mr. Obama to address the current malaise through fresh spending, analysts said Friday.

"The Fed is still very much prepared to employ more measures to prop up the economy but, unlike last year, Mr. Bernanke seems frustrated by politicians," said Paul-André Pinsonnault, senior fixed-income economist at National Bank Financial Group in Montreal. "He is calling for Congress to complement his actions instead of rendering them less effective."