Is Ben Bernanke Tough Enough?
Is the Federal Reserve’s chairman, Ben S. Bernanke , too nice for the job?
That’s the view of many on Wall Street, who argue that with the stock market falling, unemployment rising and the economy flirting with a recession, Mr. Bernanke should be dealing with the situation more aggressively than he has so far.
Their quarrel is partly with the Fed’s reluctance to cut interest rates even more than it already has. But mostly those on Wall Street object to what they describe as the Fed’s failure to accompany each cut with a tough, blunt statement on the dangers ahead — embracing language that implicitly promises more interest rate cuts, and soon, to right the economy.
They also complain that Mr. Bernanke, a former Princeton University economics professor bent on building consensus among the Fed’s policy makers, appears to be reluctant to strong-arm his colleagues at the Federal Reserve the way his predecessors Alan Greenspan and Paul A. Volcker often did.
“Bernanke should be making stronger statements and then backing them up with decisive easing,” said Jan Hatzius, chief domestic economist for Goldman Sachs , who argues that the short-term benchmark interest rate the Fed controls should be cut to 3 percent by year’s end. The rate is now 4.25 percent, already down a full percentage point since mid-September.
“Personally, I think we should be at 3 percent right now,” said James Glassman, a senior economist at JPMorgan Chase . “You ask anyone on Wall Street, ‘If Bernanke cuts to 1 percent or 2 percent or 3 percent, would that fix the problem?’ Most people would tell you that would certainly start the healing.”
Despite the criticism from Wall Street, which has a vested interest in lower rates, Mr. Bernanke has plenty of defenders, particularly among academic economists, who say he is exceptionally qualified for the task of steering the nation’s monetary policy.
“He has spent his entire career studying financial market disruptions and economic disturbances,” said Mark Gertler, a New York University economist, “and no one has a better understanding of these phenomena than he does.”
The debate over Mr. Bernanke’s performance is occurring against the backdrop of a worsening economy, which is becoming an evermore serious concern of voters in the presidential primary campaigns. That has put even more pressure on the Fed to set aside its worries about inflation and respond to evidence that the collapse of the housing market is spreading to other sectors.
Far more than his predecessor, Mr. Bernanke is trying to move away from top-down policy-making and toward actions and statements that reflect the differing views of the Fed’s 10 current policy makers. He is likely to outline his latest thinking in a speech in Washington scheduled for Thursday. His colleagues at the Fed also speak regularly, and their various voices add to the criticism from Wall Street.
Striving for consensus is laudable, those in the financial markets say, when the economy is robust and what the Fed does is not quite as critical. In good times, the markets can tolerate a Fed that tries in its public statements to reconcile the divergent views of its policy makers. But in a crisis, Mr. Hatzius said, summing up a widely held view on Wall Street, “I would favor the leadership taking charge.”
The statements issued by the Fed’s policy makers after each recent rate cut have stopped short of declaring that the greatest risk to the economy is on the downside. Such phrasing would be a clear signal that inflationary pressures were not a significant concern among the policy makers and that another rate cut was likely, to avoid a recession. So far, the statements have talked only of economic growth slowing or of “increased uncertainty surrounding the outlook for economic growth and inflation.”
“They are too caught up in the nuances of the language they use,” said Mickey D. Levy, chief economist at the Bank of America .
Bernanke is scheduled to discuss the economy and the financial markets at a 1 p.m. ET speech in Washington, sponsored by Women in Housing and the Exchequer Club. He will also take questions. CNBC.com will carry the complete session live.
In the central bank’s defense, Donald L. Kohn, the Fed’s vice chairman, addressed a gathering of largely sympathetic economists last week at the annual meeting of the Allied Social Science Associations in New Orleans.
“We cannot say more than we know,” Mr. Kohn declared, “and we should strive to avoid giving people the impression that we know more than we do.”
Many in his audience were academic economists: colleagues, in effect, of Mr. Bernanke, who became Fed chairman two years ago after serving as a Fed governor and as President Bush’s chief economic adviser. He came to Washington after a distinguished career at Princeton, where he made his reputation as an expert on policy failures in dealing with the Depression of the 1930s.
As a group, his fellow economists favor Mr. Bernanke’s attempts to be more informative about the Fed’s deliberations and to reflect diverging viewpoints in the statements and the rate cuts.
“I think personally that the rate cuts have been just about right,” said John B. Taylor, a Stanford University economist who served as a top Treasury official in the early years of the current Bush administration.
Still, a growing number of academic economists are concerned that the economy will not respond to lower interest rates. They note that the Fed, apart from lowering rates, has also made money available on easy terms to banks and to other lending institutions.
But despite the ever easier terms, lenders and borrowers appear reluctant to act. The Fed’s rate cuts have failed, at least so far, to lift borrowing and spending by as much as such stimulus often has in the past.
“People have more debt than they can afford to pay and they gambled on house prices going up forever,” said Joseph E. Stiglitz , a Columbia University economist and a Nobel laureate. “There is no way that Fed policies can undo these harsh realities. Bernanke needs to say to Congress, ‘We have reached the limits of what responsible monetary policy can do.’ ”
Indeed, no matter what the Fed does, it may not be able to prevent a recession. That is one reason a number of experts, including Mr. Stiglitz, are also calling for fiscal stimulus in the form of tax rebates for low-income families, or extended unemployment insurance or other subsidies to help counter the downward pressures on consumer spending.
“Among economists,” said Peter R. Orszag, director of the Congressional Budget Office , “a vigorous debate has arisen just over the past few weeks about whether fiscal stimulus would be beneficial and if so what kind.”
On Wall Street, fiscal policy gets minimal attention. That is partly because Congress is often slow to act and because many there believe that the Fed’s rate cuts, by themselves, should be able to revive the economy.
“Monetary policy,” said Lawrence H. Meyers, vice chairman of Macroeconomic Advisers and a former Fed governor, “has been challenged but not neutralized.”
And then there is self-interest. Wall Street traders and investment bankers are counting on drastic rate cuts to help make stock prices rise, says Albert M. Wojnilower, a consultant to Craig Drill Capital, a hedge fund. Rising stock prices, in turn, help lift year-end bonuses, which were relatively small this past year.
“It is easier for people on Wall Street,” Mr. Wojnilower said, “to cloak their personal desires in a national concern.”