Baum on Money: Goodbye Bernanke, Hello Taper?
Good morning, all. It's a new week with lots of good reading to start it.
Assessing Bernanke's time at the Fed
The Financial Times' Robin Harding kicks off what is sure to be a month of hosannas -- and criticism -- for the reign of Ben Bernanke at the Federal Reserve. While the U.S. still suffers from slow growth and high unemployment, the Fed's actions under Bernanke deserve credit for stabilizing the economy during the financial crisis. Like most Fed policy makers, Bernanke failed to identity the implications of the subprime crisis -- no, it wasn't "contained" -- but once he did, his response was forceful and creative. Bernanke defied critics on both sides by averting both deflation and inflation, and the U.S. outperformed the rest of the world in large part because of the Fed's aggressive monetary policies.
Flip a coin on Fed tapering this week
It's a close call whether the Fed will implement the first tiny tapering step this week or just talk about it. The Wall Street Journal says only two of the Fed's three preconditions for tapering -- an improvement in growth and employment -- have been met. Inflation remains well below the Fed's 2 percent target. Of the 43 economists polled by the Journal, 11 said the Fed would start tapering this week while 30 said it would wait until early next year. Bill McBride at Calculated Risk is watching the Fed's projections for inflation. If policy makers think low inflation is transitory, they might be willing to taper now. If they expect it to persist, they will wait to reduce asset purchases. And we know how well their previous projections have worked out, right?
More secular stagnation (of ideas)
Larry Summers is back with a follow-up on secular stagnation, an old idea he resuscitated at an IMF conference last month. Summers challenges the presumption that "normal economic and policy conditions" will return at some point. Without missing a beat, he asks why the economy hasn't returned to normal. All of this has "profound policy implications," he says. But wait: There are "grounds for optimism" in the recent data. Or is it another false dawn? Summers concludes that secular stagnation is "a contingency to be insured against -- not a fate to which we ought to be resigned." It sounds to me like a phrase that needs to be strangled before it multiplies.
Fischer at Fed yields some unintended consequences
It's not every day that the No. 1 at a central bank becomes the No. 2 at another central bank, but it looks like Stanley Fischer is about to make the transition. David Warsh of Economic Principles sees some potential benefits to U.S.-Israel relations (Fischer holds dual citizenship) from his appointment. And Fischer would strengthen the Fed as U.S. banks restructure in an attempt to maintain their global competitiveness in a post-Dodd Frank world. I can think of one area in which the Fed desperately needs Fischer's help: communication policy. Fischer's recent comments suggest he's one of the few who understands that central bankers can't be transparent when it comes to an uncertain future.
The triumph of incrementalism
That's what the Washington Post's Robert Samuelson calls the Murray-Ryan budget deal approved by the House of Representatives last week. It beats the alternative (another government shutdown) but does nothing to address the nation's long-term fiscal problems. "There’s no pretense of dealing with the underlying mismatch between taxes and spending," Samuelson says. And the small amount of deficit reduction over the 10-year budget horizon can easily be reversed by another Congress. Bottom line: Muddling through is fine for now, but there's always the risk that a crisis imposed by outside events forces the changes that are needed.
(Caroline Baum is a Bloomberg View columnist. Follow her on Twitter.)