Sunday, August 28, 2011

Bernanke at Jackson Hole

Finally got around reading Bernanke's speech.  A bit underwhelmed to tell you the truth. Krugman seems to be happy with the fact that Bernanke acknowledged that the recovery is weak, at best. In terms of policy what he said is the following:
"In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, in the statement following our meeting earlier this month, we indicated that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."
In other words, short-term rates will remain low.  On long-term rates (i.e. quantitative easing) he said nothing.  Worse, his comments on fiscal policy were terrible.  He said:
"To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. 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."
Can you imagine if in 1937-38 (the Roosevelt recession) the concern would have been with not allowing the debt-to-GDP ratio to grow.  Why? Does Bernanke know anything about a magical number above which the debt-to-GDP ratio has a negative impact on the economy?  Has he accepted the Rogoff-Reinhart view that beyond 90% we are doomed? The size of debt in domestic currency with respect to GDP is irrelevant, and shouldn't be a concern.

At any rate, it seems that between congressional Republicans and Obama fiscal stimulus is off the table (in fact, expect fiscal contraction), and monetary policy is wait and see with no radical measures.  So the economy will continue to stagnate.  As Christina Romer said we're "pretty darned f_cked!"

PS: I'll say more on Rogoff-Reinhart in another post.

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