Fed chairman lectures Congress

Giuseppe Macri Tech Editor
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Federal Reserve Chairman Ben S. Bernanke claimed Wednesday that Congress’ refusal to increase deficit spending and add more quickly to the nation’s $17 trillion debt is bad for the economy.

Testifying before the House Joint Economic Committee about economic policy and outlook, Bernanke presented a straightforward Keynesian argument against fiscal discipline, blaming the legislative branch for allowing President Obama’s sequestration plan to go forward and claiming that fiscal stimulus must be revived to accompany the Fed’s unprecedented expansion of the money supply.

Bernanke claimed, “The expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year.”

Bernanke, who has now presided over the longest period of economic stagnation since the Great Depression, fielded questions from lawmakers over the Fed’s indefinite quantitative easing program. The chairman told the committee that ending the program now and allowing interest rates to rise would likely pose a grave threat to an already frail economy.

The U.S. monetary base has increased more than threefold on Bernanke’s watch, an expansion that on its face does not appear to have brought prosperity. GDP growth has been extremely low or flat, unemployment has never dipped below 7 percent, new business creation has been at a standstill and according to a Fed study, individual household net worth declined nearly 40 percent between 2007 and 2010.

Nevertheless, Bernanke dismissed criticism of Fed policy from committee chairman Rep. Kevin Brady, a Texas Republican. To Brady’s warning that the bank’s bond buying policy could cause inflation, Bernanke said tightening economic policy now would strangle what he claims is a nascent economic recovery.

Instead, Bernanke argued, Congress should follow the Fed’s lead by pushing more stimulus. Federal policy of slower spending increases and tax hikes “continues to be an important determinant of the pace of economic growth,” the former economics professor claimed  in his prepared statement.

“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said in his statement. “Monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.”

According to Bernanke the central bank’s progressive bond buying and resulting low interest rates are essential right now. The chairman defended his response by saying that expanding credit through purchasing more than $80 million a month in bonds and Treasuries has helped reinflate housing prices and encouraged automobile purchasing.

“The Congress and the Administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run,” Bernanke said.