Ben Bernanke Meets Elizabeth Warren
The Federal Reserve's semi-annual testimony to Congress rarely offers any surprises, and the first day of Chairman Ben Bernanke's appearance this week mostly fits the pattern.
Bernanke confined himself almost entirely to restating things he's said before. He told the Senate Banking Committee that the current stance of "highly accommodative" monetary policy met the Fed's cost-benefit test. It's supporting a "moderate if somewhat uneven pace" of economic expansion, he said, with inflation safely anchored and other financial risks under control. He gave no sign of a near-term change in the policy.
The liveliest moment came when Senator Elizabeth Warren went after Bernanke over implicit subsidies to the banks, citing Bloomberg View calculations that the benefit of expected bailouts is more than $80 billion a year. How can that be justified, the Massachusetts Democrat asked? Whatever the exact figure, it can't be, he said. The challenge is to attack the underlying expectations -- which the Dodd-Frank Act and the reforms it will usher in should help to do.
On the financial risks of keeping long-term interest rates very low, he conceded there's a danger if investors start "reaching for yield" too eagerly. On the other hand, he said, some increase in risk-taking is a natural and desired part of a normal economic upturn. Moreover, current monetary policies "also serve in some ways to reduce risk in the system, most importantly by strengthening the overall economy, but also by encouraging firms to rely more on longer-term funding, and by reducing debt service costs for households and businesses." Hard to disagree.
He said a bit more than he has before on one aspect of the "exit" issue -- that is, the difficulties the Fed might face once its program of large-scale asset purchases comes to an end. He looked at the budgetary dimension, perhaps in response to "Crunch Time: Fiscal Crises and the Role of Monetary Policy," a paper released last week by David Greenlaw, James D. Hamilton, Peter Hooper and Frederic S. Mishkin, which has drawn a lot of attention.
The paper's authors worry that the Fed will realize losses on the assets it has bought, and this will have implications for the government's budget through lower Fed remittances to the U.S. Treasury. Bernanke said that the Fed had looked at this, and that remittances could be "quite low for a time in some scenarios, particularly if interest rates were to rise quickly." Even then, however, he said that remittances would remain higher than the historical average. In a situation where remittances were cut by rising interest rates, he also said, the economy would be stronger -- that's why interest rates would be rising -- and this would reduce the government's budget deficit by far more than the fall in remittances would increase it.
Well, that's true as long as interest rates aren't rising for some other reason -- such as fear of inflation under conditions of continuing low growth, an unlikely scenario, no doubt, but not an impossible one.
As always, Bernanke offered Congress some excellent advice on the more conventional aspects of fiscal policy. The sequestration due to start at the end of this week is no way to write a budget, he patiently explained. He quoted Congressional Budget Office estimates that project an additional reduction in gross domestic product growth of 0.6 percentage point this year if the sequestration goes ahead in its current form. In general, he said, fiscal policy has been tightened too abruptly in the short term while efforts to deal with longer-term budget imbalances have "only begun."
Bernanke's absolutely right. It's a shame that Congress requires this testimony twice a year and then ignores it -- but, as I mentioned before, some things never change.
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Clive Crook at firstname.lastname@example.org