Ben Bernanke spoke at the New York Economic Club today and warned about the dangers of the impending fiscal cliff. The text of his speech can be seen here.
- Economy recovering at a slow pace. “Since the recession trough in mid-2009, growth in real GDP has averaged only a little more than 2 percent per year.”
- “inflation has generally remained subdued” (except for, you know, gas, food, medical bills, etc)
- “the pendulum appears to have swung too far” in the housing sector, with lenders being tightwads with their money
- “tight credit and a high degree of risk aversion have restrained economic growth” (ie: credit and capital markets suck)
- the financial situation in Europe sucks
- U.S. fiscal policy sucks
Ah, yes, U.S. fiscal policy. Barnanke goes on to say:
Congress and the Administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law–the so-called fiscal cliff. The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery–indeed, by the reckoning of the Congressional Budget Office and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession.
Bernanke says that a failure to increase the federal debt limit would impose heavy economic costs, and that “the federal budget is on an unsustainable path.”
Uncertainty about how the fiscal cliff, the raising of the debt limit, and the longer-term budget situation will be addressed appears already to be affecting private spending and investment decisions and may be contributing to an increased sense of caution in financial markets, with adverse effects on the economy. Continuing to push off difficult policy choices will only prolong and intensify these uncertainties. Moreover, while the details of whatever agreement is reached to resolve the fiscal cliff are important, the economic confidence of both market participants and the general public likely will also be influenced by the extent to which our political system proves able to deliver a reasonable solution with a minimum of uncertainty and delay.
Also interesting is that Bernanke maintains that the FED is “doing its part,” but that “monetary policy can help support the economic recovery, it is by no means a panacea for our economic ills.”
In other words, don’t blame the FED! Actually, this speech makes it sound like Benny is getting desperate. I think he is starting to drop hints that he can’t fix the problem. But if he expects congress to solve it, then I think it’s Thelma and Louise time. How long before he’s seen in a bar telling people what he really thinks?
Or maybe he’ll snap and rob a bank, getting away in a double decker bus!