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Bernanke on Austerity: Don't Do It

Ben Bernanke
Ben Bernanke

Taking aim at those who would make short term cuts in federal government spending, Federal Reserve chairman Ben Bernanke made one of his most political speeches ever at a luncheon for the Economic Club of Minnesota in Minneapolis, Minnesota.

“There is ample room for debate about the appropriate size and role for the government in the longer term, but—in the absence of adequate demand from the private sector—a substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring,” Bernanke said.

Translation: There is NOT ample room for debate about the role of government spending in the short term. Cuts will curtail economic growth and causes more unemployment.

This is clearly meant to counter those who argue that we need immediate austerity at the federal level in order to combat ballooning deficits and debts.

Bernanke said that the weakness in housing and financial volatility were two reasons that the recovery from the recession has been far weaker than previous recoveries. But he singled out government spending as the important factor for short term future growth.

It’s rare to see a Fed chairman taking such a strong stance on short term fiscal spending. We’re far more accustomed to dire warnings about long term budget problems. This focus on the short term directly introduces Bernanke into the debate about the federal budget taking place on Capitol Hill.

It’s no coincidence that Bernanke gave this warning about fiscal policy on the first day the so-called “Super Committee” is meeting in Washington, D.C., to begin negotiating deficit reduction matters.

Bernanke seemed to be instructing the Super Committee members not to agree to serious cuts in short term spending.

At the end of his speech, Bernanke hinted that the consequences of serious spending cuts could be quite dire.

“I do not expect the long-run growth potential of the U.S. economy to be materially affected by the financial crisis and the recession if—and I stress if—our country takes the necessary steps to secure that outcome,” he said.

Bernanke’s remarks on monetary policy were quite short. He reiterated that “the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.”

“My FOMC colleagues and I will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September and are prepared to employ these tools as appropriate to promote a stronger economic recovery in a context of price stability,” Bernanke said.

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