Forget what you read in the newspapers about the “fiscal cliff.” The real showdown in Washington is not between Democrats and Republicans. It is the bizarre collision between self-righteous politicians of both parties promising to shrink government spending and raise taxes, while the supposedly independent and nonpartisan Federal Reserve pleads with them to stop before they totally wreck the economy. What threatens to take the country over the cliff is the political momentum of the establishment’s wrong-headed propaganda.
The mild-mannered Fed chairman Ben Bernanke is standing in the way, but nobody important seems to take him seriously. Though not given to inflammatory rhetoric, Bernanke is virtually standing in the middle of Pennsylvania Avenue, waving his arms and screaming at the lawmakers. Turn back! You are heading in the wrong direction. Don’t you understand? The real economic problem is not too much government debt. It is too few jobs!
This message was again delivered by the Federal Open Market Committee at its meeting this week when it formally declared job creation as its central objective. The Fed hopes to stimulate employment by keeping interest rates near zero and pumping many more billions into the economy—at least until the unemployment rate falls to 6.5 percent. Fed officials, however, do not expect that to occur before the end of 2015.
Three more dreary years ahead, further weakening economic fiber and national spirit. The Fed chairman described the persistence of mass joblessness as “a waste of human and economic potential.” At his press conference, Bernanke allowed: “If we could wave a magic wand and get unemployment down to 5 percent tomorrow, obviously we would do that.” If Congress and the president allow the huge downshift in government scheduled for January 1, Bernanke warned: “We would try to do what we could…but I just want to again be clear that we cannot offset the full impact of the fiscal cliff. It’s just too big.”
In these circumstances, the Federal Reserve is a weak reed to lean on. It is essentially attempting to stimulate lending and spending in the private economy by altering the “expectations” of investors and business managements. By assuring those decision makers they can count on very low rates and easy money conditions for at least another two or three years, the Fed hopes this will create a bigger appetite for risk-taking. Maybe so, but skeptics are plentiful. The Fed’s extreme policy of easy money has been in place for nearly four years and it hasn’t worked yet.
After the crash of 1929, the ineffectiveness of monetary policy was disparagingly described as “pushing on a string.” Bernanke’s Fed is at risk of acquiring the same reputation.
Banks and business corporations are sitting on trillions in surplus cash and bank reserves, making handsome profits while the real economy languishes. Yet the Bernanke Fed has so far declined to take bolder actions. Financial manipulations are the orthodox response of central bankers, but real investment remains limp or nonexistent. If political leaders dared to engage genuine debate on the economy, they would embracing bigger spending plans themselves and lean hard on the Fed to take more concrete measures like direct lending to the real economy or regulatory pressures to force open the bank credit channels.
For now, the country is preoccupied with a phony crisis that might please some bookkeepers but will do nothing to jump-start a stronger recovery. The Obama administration has tried to have it both ways—devoting lots of political energy to the debt and deficit problem, not so much to the larger ailment of economic weakness. I think we are witnessing the hangover from thirty years of conservative idolatry—the political worship of so-called free markets and deregulation. Democrats are infected too—either afraid to propose aggressive measures or ignorant of what is possible in crisis. The bean counters are still in the saddle. They may be dislodged only if the country is driven into another bloody recession.
Where is big government when we need it?
For the latest on the fiscal cliff debate, check out Washington correspondent George Zornick's blog.