Federal Reserve Board Chairman Ben Bernanke. Reuters/Molly Riley
Despite what you may have read in the newspapers or heard from the president’s cheerful speeches, the economy is not out of the danger zone. Despite some encouraging indicators recently, both the US economy and the world’s remain in perilous condition, still threatened by the larger catastrophe Washington officials thought they had averted. That is, a renewed global recession will compound the losses and can swiftly morph into the big D, for depression.
At least nine of the economies in Western Europe are already contracting. Their euro debt crisis threatens to pull down others. The anemic American recovery remains stalled by its blocked housing sector—there are still too many homeowners drowning in mortgage debt to trigger normal home sales and construction. Private investment is sagging, corporate profits softening too. Even China’s growth is slowing at an alarming rate.
If Congress fails to defuse the threat of the post-election “fiscal cliff,” austerity will be in the saddle for sure. The International Monetary Fund, not usually known for dire forecasts, predicts increased risk of worldwide stagnation, and has warned specifically against the “excessive fiscal consolidation” of austerity measures. Why haven’t the presidential candidates talked about this? Maybe for the same reason they didn’t talk about global warming: they saw no votes in either.
Federal Reserve chair Ben Bernanke, almost alone among influential officials, has been sounding the alarm in his understated, scholarly manner. The former Princeton economics professor is an authority on the Great Depression, and especially on the danger of cutting back government stimulus prematurely before a vigorous recovery is established. Bernanke has vowed that he will not repeat the big mistake the New Dealers made in the 1930s.
It seems out of character for a central banker to make a special plea for the unemployed, but that’s what Bernanke has been doing. In August, he warned a Fed symposium that “the stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”
Janet Yellen, vice chair of the Fed’s Board of Governors, was more explicit. In her own speech earlier this past summer, she warned about “a number of significant downside risks to the economic outlook…adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.” In other words, an unwinding that cannot be stopped.
The Fed has already created trillions of dollars and pumped that new money into the financial system, hoping that lowering interest rates to near zero would stimulate spending and production. In September, Bernanke tried again with a third round of “quantitative easing,” though many economists are skeptical, since twice before the flood of “easy money” did not fulfill the chairman’s intentions. Bernanke said he would keep trying until the Fed gets it right.
So the Fed chairman is now gingerly searching for other options—interventions that might go beyond the central bank’s usual financial tools and force-feed the economy more directly and tangibly. In particular, he is exploring a special program recently launched by the Bank of England dubbed “funding for lending.” The British central bank will reward commercial banks with favorable rates if they provide more generous credit to help businesses wanting to expand—that is, to create jobs. The scheme will also penalize banks if they fail to meet those goals.