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Tuesday, October 05, 2010 1:25 AM

Bernanke says Lawmakers Should Consider Rules on Fiscal Limits; Expect Hissy Fit from Krugman; Bernanke Pisses in the Wind

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Proving that he far more of a Monetarist clown than a Keynesian clown, Bernanke Calls on Lawmakers to Consider Rules on Fiscal Limits

Federal Reserve Chairman Ben S. Bernanke called on U.S. lawmakers to consider rules limiting federal spending, annual deficits or accumulated debt to curtail the risk of a fiscal crisis.

“Well-designed rules can help promote improved fiscal performance,” Bernanke said today in a speech in Providence, Rhode Island. A rule “could provide an important signal to the public that the Congress is serious about achieving long-term fiscal sustainability, which itself would be good for confidence,” he said.

Bernanke provided one of his most detailed prescriptions yet for reducing the record federal budget deficit. He said in congressional testimony in June that unless the U.S. makes a “strong commitment to fiscal responsibility,” the country in the long run will have neither economic growth nor fiscal stability.

“It is crucially important that we put U.S. fiscal policy on a sustainable path,” Bernanke said at the Rhode Island Public Expenditure Council’s annual dinner, where he was invited to speak by Senator Jack Reed, a Democrat from Rhode Island and member of the banking committee.

“The only real question” is whether adjustments to taxes and spending will come from a “careful and deliberative process” or from a “rapid and painful response to a looming or actual fiscal crisis,” Bernanke said.

Bernanke cited Switzerland, Sweden, Finland, the Netherlands, Canada and Chile as countries that improved their budgetary performance by using fiscal rules. He didn’t elaborate on what kinds of spending, deficit or debt limits would be best.

“I do think that the additional purchases -- although we don’t have precise numbers for how big the effects are -- I do think they have the ability to ease financial conditions,” Bernanke told the students.
Fiscal Sustainability and Fiscal Rules

The above excerpts are from a speech Bernanke gave at the Annual Meeting of the Rhode Island Public Expenditure Council, Providence, Rhode Island.

The speech was on Fiscal Sustainability and Fiscal Rules

Expect Hissy Fit From Krugman

Paul Krugman, flag bearer for the Keynesian clowns, is without a doubt having a hissy fit at the thought of any step, no matter how small, regarding Bernanke's statement “It is crucially important that we put U.S. fiscal policy on a sustainable path.

Krugman might object to that characterization, by claiming he is all in favor of fiscal prudence, but only after Keynesian stimulus leads to a full recovery.

The reality is Keynesian clowns in Congress and Monetarist clowns at the Fed have both wrecked the economy to a point that severe pain is not avoidable. Indeed, the unemployment rate and bank lending both say the economy is following a path of severe pain.

Monetarist Nonsense

Bernanke claims Quantitative Easing will "ease financial conditions.” Forgive me for asking the obvious, but what the hell needs easing?

Mortgage rates are at all time lows in spite of the fact that housing itself is in the gutter and risk of default is high, junk bonds are back to par, and the ability for corporations to get financing for total garbage is at or near historic highs.

If anything, Bernanke has ignited a bubble in junk bonds. The one thing Bernanke has not done is ignite bank lending.

Bernanke Pisses In Wind

The problem Bernanke faces is low rates will not stimulate bank lending. I discussed why at great length in QE Engine Revs, Car Goes Nowhere.
The economy is stuck in neutral so stepping on the QE gas pedal is highly unlikely to accomplish much except increase the noise level. Yet, the philosophy at the Fed seems to be, if gas doesn't work, give the engine more gas.

Providing unneeded liquidity may or may not help asset prices (please see Sure Thing?! for a discussion) but if quantitative easing helped the real economy, at some point yields would stop falling.

Clearly the Fed has no clue as to what to do, but it wants to "do something". The only thing the Fed can think of doing (or is willing to do) is have another round of quantitative easing, so the Fed eases whether it makes any sense or not.

The simple fact of the matter is increased borrowing power or lower interest will not cause business businesses to expand. I have discussed this point at length in

Here are a few charts from NFIB Small Business Trends for September.

Prices Received

Actual Price Changes

Single Most Important Problem

The single most important problem is lack of customers. Access to credit is not even on the list. Small businesses don't want loans because they don't have any customers and prices they receive are falling like a rock.

This is deflation in action, and it is crucifying small businesses.

Floods Everywhere

The response from the Fed is to provide more liquidity. Hell, water is everywhere already. The action in corporate bonds alone proves it. Some think that liquidity will continue to flow into equities.

However, with junk bonds already at parity, it seems to me that gold and treasuries are a better bet.

Regardless, please note how Bernanke's policies have robbed those living on fixed income, now earning 0% on their savings.
Yet, here we go again, with another round of QE, another round that cannot possibly do anything positive for the real economy, but try we must because Bernanke does not want to appear like the powerless charlatan that he is.

Bernanke now attempts to distance himself from the Keynesian clowns, secure in the knowledge that Congress is highly unlikely to show any real prudence.

Calculated Risk Blasts Bernanke

It is very rare to see Calculated Risk take a hard swipe at anyone, let alone the Fed, but Bernanke managed to cross the line.

Please consider Calculated Risk's post Bernanke breaks promise, discusses fiscal issues
This speech isn't worth reading for substance (Ben Bernanke is clueless on budget issues), but it reveals something about Bernanke.

Bernanke never mentioned "PAYGO" when he was head of the Council of Economic Advisors in 2005. In fact Bernanke barely mentioned the deficit in 2005 - except in postive terms - even though the structural deficit was in place and the cyclical deficit was coming (because of the housing bubble).

Today he said:

Our fiscal challenges are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors. Two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health-care costs.

Weren't the baby boomers going to get older in 2005? Oh my ...

This is an issue that 1) is outside of Bernanke's area of responsibility, 2) he has promised not to discuss, and 3) he has zero credibility on. Enough said.
No Credibility on Anything

While Calculated Risk points out Bernanke has no credibility on fiscal issues, I point out that Bernanke has no credibility on anything.

Bernanke certainly did not see the housing bubble, he did not think the unemployment rate would get above 8.5%, he did not see a credit collapse, he never admitted the Fed's role in this mess, and he calls himself a student of the great depression but does not have a clue as to why it happened. I could go on, but I won't.

Instead I will point out that he is diving into fiscal issues when he said he wouldn't. That makes him a liar as well.

The irony in Bernanke's speech is that Congress really does need limits on spending.

The correct place to start would be a balanced budget amendment. That would stop needless warmongering and other stupidities like bank bailouts right up front before they even started.

Why Now?

In regards to Bernanke's new-found fiscal conservativeness, Calculated Risk asks "I wonder why? Well, he missed the housing bubble completely - but what about the structural deficit?"

The answer should be pretty easy to spot.

Bernanke, knows full well Congress is unlikely to act in any meaningful way. When they don't, and when a global currency crisis is well underway, Bernanke will point his finger and blame Congress.

Thus, Bernanke's statements are not about fiscal prudence, but rather all about absolving the Fed in general, and Bernanke in particular for the upcoming global financial collapse.

Mike "Mish" Shedlock
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