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Bernanke Supports Fiscal Stimulus, Opposes Chinese Currency Manipulation

Ben Bernanke absorbed a couple weeks of shots from hard-money Republicans desirous of stopping any growth-inducing monetary policy. Friday, he struck back – not necessarily by just defending his monetary policy, but by calling for fiscal policy enhancements and hitting China for endangering world economic growth:

[O]n its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years. As a society, we should find that outcome unacceptable. Monetary policy is working in support of both economic recovery and price stability, but there are limits to what can be achieved by the central bank alone. The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs. However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve […]

The exchange rate adjustment is incomplete, in part, because the authorities in some emerging market economies have intervened in foreign exchange markets to prevent or slow the appreciation of their currencies. … why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals? The principal answer is that currency undervaluation on the part of some countries has been part of a long-term export-led strategy for growth and development. This strategy, which allows a country’s producers to operate at a greater scale and to produce a more diverse set of products than domestic demand alone might sustain, has been viewed as promoting economic growth and, more broadly, as making an important contribution to the development of a number of countries. However, increasingly over time, the strategy of currency undervaluation has demonstrated important drawbacks, both for the world system and for the countries using that strategy.

We know Bernanke is a conservative Republican who dragged his feet on any monetary actions while the Fed failed in both maximizing employment and achieving price stability. So this is about as good as it’s going to get for him – recognizing that fiscal stimulus is urgently needed, and that China’s breaking the rules on currency manipulation. He still wants to focus on reducing government borrowing when millions are out of work, but at least he wants to hold off on that for a while.

Others can and will make the argument that the carping from Republicans, China and Germany threatens a global depression, cutting off all avenues for recovery. Bernanke supported that by calling out a couple legitimate issues in his speech. At least he’s not retrenching on measures to support economic growth.

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David Dayen

David Dayen