By Nicholas Wapshott
June 2 (Reuters) – Whisper it abroad: The U.S. economy is on
the mend.
Most recent indicators suggest that, five years after the
start of the Great Recession, the “L-shaped” recovery is finally
heading north. The stock market is booming, and home prices are
on the upswing. The rising price of houses makes people feel
richer, and consumer confidence is on the mend. Private
borrowing is up, and consumers are starting to spend again.
Growth is not great, at about 2.5 percent to the end of the
year, when the postwar average is 3.2 percent, but it is steady
and appears to be self-sustaining. And this despite the 1.5
percent reduction on what growth would be were it not for the
clumsy sequester’s fiscal drag. The general outlook is bright,
if not sunny. As Winston Churchill said after the Battle of
Alamein, “This is not the end. It is not even the beginning of
the end. But it is, perhaps, the end of the beginning.”
Why whisper this good news? Because the idea that we have
achieved recovery suggests to some it is time for the Federal
Reserve to change tack. Monetary policy is the only instrument
the administration has left. Hampered by a hostile House of
Representatives, President Barack Obama’s “jobs bill” to
stimulate the economy is long forgotten. Even he doesn’t mention
it anymore.
But the Fed has a medium-term strategy that means keeping
interest rates low so long as unemployment remains stubbornly
high. It therefore plans to continue pumping money into the
economy through quantitative easing at the rate of $85 billion a
month to the horizon. The last meeting of the Fed’s board
maintained a steady-as-she-goes policy, with the usual suspects
in the minority anxious about the inflationary implications of
quantitative easing.
There is no inflationary pressure, nor is there likely to
be. The austerity policies of the European Union, the only rival
to America in terms of size and sophistication of economy, have
pushed the euro bloc into recession and are keeping the euro
weak. The same is true of Britain, where austerity has led to a
near-triple-dip recession and sterling is trading lower.
America’s old trade rivals the Japanese are on a QE binge, and
the yen is sinking fast. As the world’s biggest economy is still
growing, there has been a flight to the dollar that has pushed
up the exchange rate and kept domestic inflation down.
Month by month we can expect more pressure on Fed Chairman
Ben Bernanke to put his foot on the brake, reduce or stop
altogether the QE program and allow interest rates to rise.
There are endless siren voices urging him to alter course now.
Like health insurance adjusters who patrol hospital wards
looking for malingerers, the argument is: If the economy is on
the mend, why do we need to keep taking the cure?
It is such a relief to have finally escaped from the worst
recession in 80 years that it is natural to want to get back to
“normal,” even though we know that since the traumas of 2008-09
nothing will ever be quite the same. The same temptation to
return to the old ways lured Franklin Roosevelt to prematurely
abandon his New Deal stimulus measures in 1937. The result was
“the Roosevelt Recession,” a wrong turn in the history of the
New Deal that both progressives and conservatives prefer to
forget because of the unnecessary pain caused by braking too
soon.
In brief: In 1937 Felix Frankfurter persuaded FDR, whom John
Maynard Keynes rightly pointed out knew little to nothing about
economics, that blue skies were ahead and it was time to adopt
what today we would call austerity measures. In 13 hellish
months, unemployment leapt from 14.3 percent to 19 percent and
output collapsed by 37 percent. America only resumed its
sputtering recovery after Congress in early 1938 passed a bill
to boost government spending.
The key today to maintaining our steady growth and avoid
sliding back into recession is not the new chairman of the
president’s Council of Economic Advisers, Jason Furman, whose
elevation signals more of the same. It is who the president
picks to succeed Bernanke, who is expected to step down after
two terms as Fed chairman in January.
Bernanke was born to be Fed chairman in the middle of a
financial crisis. He literally wrote the book about the Great
Depression and used the lessons learned from his studies to
avoid repeating the mistakes made 80 years ago that caused our
great-grandparents such protracted misery. There was no better
time for someone with a profound knowledge of the history of
economic thought to be in charge of the Fed than when the
financial slump broke over our heads in 2008.
Bernanke was a keen student too of Milton Friedman, whose
research with Anna Schwartz led to him blame the Fed’s
over-tight monetary policies in the Twenties for provoking and
then exacerbating the Great Depression. On Friedman’s 90th
birthday, Bernanke offered an extraordinary mea culpa on the
Fed’s behalf. “Regarding the Great Depression,” he said, “you’re
right, [the Federal Reserve] did it. We’re very sorry. But
thanks to you, we won’t do it again.”
Much to the discomfort of conservatives devoted to the
memory of Friedman, Bernanke was as good as his word. His policy
of quantitative easing has been a textbook monetary response to
a flailing economy. His departure will spark a feisty nomination
battle that puts monetary policy at the heart of the Senate’s
business. Even if the president were to name to the post Paul
Volcker, the Democrat appointed Fed chairman by Jimmy Carter who
licked inflation under Ronald Reagan, the sound-money proponents
would say he was too soft a touch.
There are a number of good candidates the president could
pick who would follow Bernanke’s lead in ensuring there is no
premature return to a curb on borrowing through high interest
rates. Their general views on when to tighten the money supply
and their commitment to putting joblessness ahead of inflation
as a priority are similar.
Currently the “Fed Chairman Stakes” puts former Clinton
Treasury secretary and Harvard President Larry Summers a nose
ahead of former Treasury Secretary Tim Geithner and Federal
Reserve Vice-Chair Janet Yellen. Any of the three would be a
good fit. But each is sure to attract a protracted and bitter
nomination battle that would be worth avoiding with the mid-term
elections not far off. The GOP leadership is behaving more like
a protest movement than a party of government and its Tea Party
supporters will brook no compromise. After the stiletto-ing of
Susan Rice, some may feel it is time to take another hostage.
There is, however, a bolder selection that would avoid the
need for a nomination scrap altogether and would ensure perfect
continuity: having Bernanke stay at his post.
There are no term limits to oblige the Fed chairman to stand
down. Bernanke let it be known “through friends” he wanted to
depart the stage in the run-up to the presidential election when
Mitt Romney, like every other Republican presidential hopeful,
appeased his donors by pledging that his first act on entering
the White House would be to fire Bernanke. Bernanke’s comment at
the time the rumors started swirling was hardly a plea to be
allowed his freedom. “I am very focused on my work,” he said. “I
don’t have any decision or any information to give you on my
personal plans.”
In the absence of any pressing personal reason for stepping
aside, it would make perfect sense if Bernanke were to see out
the job he began. The Great Recession is not yet licked. He has
not completed the task history dealt him. He is every bit as
good as the person who would succeed him. Now is a good time for
the president to invite him onto the golf course, or have a beer
in the executive mansion garden, or do whatever it takes to keep
Bernanke in place.
