Which Central Bankers Are Thinking Big?

Federal Reserve Chairman Ben Bernanke has been desperately trying to levitate a sinking economy, by buying government and commercial bonds in whatever quantities it takes to keep interest rates at record lows. This policy has kept the Great Deflation from being even worse, but it hasn't produced a robust recovery.

The reason: Consumers are suffering from rising unemployment and declining wages, and aren't eager to spend. Still wounded banks, meanwhile, aren't eager to lend. Business is sitting on about two trillion dollars in cash, and isn't eager to invest when it doesn't see customers.

Even 30-year mortgages at record lows of 3.5 percent interest have not revived the sagging housing market. The government, despite a token program of mortgage relief known as HAMP, has not been willing to get serious about reducing the principal of mortgages where the debt exceeds the value of the house.

Prospective buyers, no longer confident of whether housing is a good investment, continue to rent, waiting for housing prices to bottom out. But prices are still falling in most metropolitan areas.

Bernanke, under fire from conservatives in Congress and in his own Federal Reserve System for courting inflation (also at near-record lows), keeps sending the politicians delicately coded messages: The Fed can't do it all. He warns that things will be even worse if the economy goes off a "fiscal cliff" in January, when the Bush tax cuts expire and automatic budget-cut triggers go off unless Congress reaches a budget deal.

Bernanke means that all this would worsen the slump by producing an ill-timed fiscal contraction. What he almost says, but not quite, is that the economy needs a big dose of fiscal expansion -- more public spending even at the cost of a short run increase in the deficit, so that faster growth will bring the deficit down over time.

The Republicans would crucify him if he said that.

Bernanke's warning on the fiscal cliff, if anything, has been ill-used by the right as demonstrating the need for more tax cuts and more stringent budget balance, even though those two goals are at odds with each other and this is the opposite of what Bernanke meant.

Bernanke has also discretely prodded the administration to get more serious about solving the mortgage mess, since the Fed can't succeed on that front by itself either.

This message is also unwelcome, especially to the Obama Treasury, where Secretary Tim Geithner is determined to protect prettied-up bank balance sheets from booking any losses on underwater mortgages.

Bernanke is torn between protecting his institution and getting more aggressive about prodding the other branches of government to do their part. He defaults to protecting the Fed. Give him an A for effort, but a D for too much discretion.

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