January 31, 2007

 

Thoughts on Japan.  Click on the following link to view a podcast discussion of what the future might hold for Japan:

http://media.mccombs.utexas.edu/MacroUpdates/Macro5.wmv

 

 

The Monetary & Fiscal Policy Waltz.  We all know that monetary and fiscal policies are very different.  Monetary policy, controlled by the Fed is seen as having a larger impact on the short-run, while fiscal policy controlled by the Administration and Congress, has a bigger impact on the long run.  Monetary policy decisions are made by the politically independence Open Market Committee, while fiscal policy is set by our constantly politically driven legislators and Administration officials.

 

Fiscal policy is so politically driven that the relatively new Fed Chairman Ben Bernanke has avoided talking about it all together.  His predecessor, Alan Greenspan, would comment only rarely about fiscal policy.  Most often Greenspan offered sound, but politically unpopular, policy advice to members of Congress.  For example, Greenspan warned of the potential economic damage large government budget deficits could do, as well as the dangers to the economy from growing governmental budget surpluses. 

 

While Greenspan’s advice was economically sound it is NOT what politicians in Washington wanted to hear.  But, Greenspan was so adept at the Washington power game he could give politically unpopular advice while remaining in the good graces of the power brokers in Washington. 

 

Now it’s Ben Bernanke’s turn.

 

Earlier this month Bernanke gave testified before the Democratic controlled Senate Budget Committee.  His testimony may go a long way in determining how long he remains Fed Chair.

 

Before the testimony Democrat Senate Budget Committee Chairman Kent Conrad had stated that he didn’t expect Bernanke to give “specific” spending or taxing recommendations, but he was expecting Bernanke to complain about government budget deficits. 

 

That put Bernanke in a tough spot.  If he parroted the recent statements from New York Fed President Timothy Geithner that government budget deficits, fixed exchange rates and growing income inequality are threats to the U.S. economy, Bernanke ran the risk of be seen as a mouthpiece for the Democrats.  On the other hand, if Bernanke poo-pooed the effect of government deficits and were to say free trade and tax cuts will stimulate the economy, he would be seen as the Republicans lap dog.

 

Bernanke tied his best to sound apolitical while stating he believes that growing government debt posses a risk to future economic growth.  Bernanke also pointed out the obvious in stating that spending on Social Security, Medicare and Medicaid are going to explode as the baby-boomers retire.  Thus, while current levels of government debt may not be harming the economy, they surely will in the future.  What Bernanke said is really not that controversial.  They are things that most economists have been worrying about for years.

 

But Bernanke is going to have to be very careful in the future.  Bernanke is going to have to do a Greenspan Waltz around the political minefield if he wants to hold onto his current job.

 

If Bernanke comes off as pandering to one side or another, his tenure as Fed Chair will certainly be a short one.  If Bernanke is seen as pandering to the Democratic controlled Congress he is unlikely to be reappointed by the Republican administration.  On the other hand, if Congress sees him as nothing but a mouthpiece for the Administration, watch for members of Congress to attack him in public, thus damaging his credibility, and perhaps even blocking his confirmation to another term. 

 

What Bernanke needs to be is come off as being above it all.  He needs to gracefully glide around politically charged topics while giving sound economic advice to policymakers.

 

Good luck with that Mr. Bernanke.

 

-M. Brandl