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The Fed Gives Up

Ben Bernanke, Chair of the Fed, gave a speech in Jackson Hole, Wyoming and told us that his big plan for helping the economy is to do nothing and hope Congress fixes it. Everything is fine, and soon we’ll be on the sunny side of the street.

… [T]he growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.

The key word here is “permanently”. Eventually all the problems will go away. Of course, it will be a rough few years before that happens.

He tells us that the usual way out of slumps is release of pent-up demand, but can’t explain how that will happen any time soon. In previous recessions, the big driver of demand was the housing sector, but it’s a wreck. In the first quarter, 10.9 million homes were underwater, about 23% of homes with mortgages, a figure which hides the desperation in states like California, where 31% of the houses with mortgages are underwater, and Florida, where the figure is 46%.

He claims that the finance sector is in better shape, with improved capital structure, but doesn’t mention that Bank of America is struggling, and recently gave Warren Buffett a deal just like the one Goldman Sachs gave him in the depths of the Great Crash. He doesn’t look at European banks, with their massive exposure to sovereign debt, or the pile of credit default swaps on those banks.

He claims that credit availability is improved. Then he admits that the small business sector, with its “impaired balance sheets”, is excluded from credit.

Manufacturing is up a bit, and the trade deficit is down. He says this is because of “improved competitiveness of U.S. goods and services.” I can translate that into English: the dollar is weak, workers are paid less, and the persistently high price of fuel discourages long-distance shipping. How is that good, again?

Then he tells us that his near term plan is to do nothing.

As to the longer term, he says housing will come back some day. Households will improve their balance sheets, on their own, somehow, because the government and the Fed aren’t going to help. He says the banking sector is improving, and claims that they continue to provide “vital intermediation functions” when in fact lending is down and the bulk of profits come from selling derivatives and other crappy innovative financial products and trading in stocks, bonds and commodities.

The big problem he sees is the national debt.

As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.1 The increasing fiscal burden that will be associated with the aging of the population and the ongoing rise in the costs of health care make prompt and decisive action in this area all the more critical. (Footnote omitted.)

He offers the usual Republican solutions to these fiscal problems: incentives to work and save, education, private capital formation, and R&D, and something really radical, public infrastructure. He doesn’t mention, but clearly implies that we have to cut Social Security and Medicare.

He seems not to know that there isn’t any reason for consumers to increase savings when interest rates are negative after inflation, a direct result of his policies to save the banking sector. He doesn’t mention that most households improve their balance sheets by paying down debt, which reduces demand.

He doesn’t seem to see that there are plenty of incentives to work, like the need to eat. We already provide massive subsidies for R&D. As to education, we already have a class of people who are hamstrung for life paying off student debt, while states increase tuition to cover the state funding of college and community colleges.

Finally, recognizing the justice of S&P’s criticism of congress in the debt ceiling debacle, he says it would help if Congress would act like adults. That’s it. His long-term plan is that Congress will manage fiscal policy wisely.

The message is clear. Rich people are doing fine. Anything the Fed does to help everyone else will hurt the rich, so the Fed will do nothing. The Obama administration has done nothing that would help the country if it would slightly impact the rich. Congress has done nothing that would help the country if it would slightly impact the rich. The only consistent thread in US economic policy is protecting the rich, including not prosecuting the crooks.

But remember, America, it’s your fault if you can’t get to the sunny side of the street to join Bernanke and his constituents.

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