Bernanke Says "Fiscal Cliff" Hurts the Economy

by John M. Curtis
(310) 204-8700

Copyright Dec.12, 2012
All Rights Reserved.                                         

           Throwing his two cents into the “fiscal cliff” debate, Federal Reserve Board Chairman Ben S. Bernanke said it was already hurting the economy.  While known by most economists, worry over the “fiscal cliff” damages the economy by creating uncertainty in markets.  When S&P downgraded U.S. debt Aug. 5, 2011, Wall Street went into a tailspin, with most of the nation’s largest funds selling off.  While there are plenty of reasons for profit taking, S&P mentioned Washington’s gridlock as the real culprit behind the downgrade.  Back in 2011, the GOP did just about everything to sabotage the economy, hoping it eventually helped Republicans in 2012.  Bernanake now makes the point that Washington gridlock continues to dog the economy as the nation braces itself for the “fiscal cliff,” when Bush-era tax cuts are set to expire with automatic government spending cuts.

             S&P’s downgrade of U.S. credit was dismissed by Bernanke in 2011 as political theater, citing the 100% certainty of the U.S. Treasury repaying its debt.  “Clearly the fiscal cliff is having effect on the economy,” said Bernanke, referring to Wall Street’s defensive position before President Barack Obama and House Speaker John Boehner(R-Ohio) settle their score.  Both sides must find common ground on tax hikes and spending cuts, something so far that‘s eluded both sides.  “I’m hoping that Congress will do the right thing on the fiscal cliff,” said Bernanke, avoiding taking sides.  Bernanke’s warned for some time against tax hikes and reducing government spending, something needed to spur economic growth.  While Boehner has characterized the talks at loggerheads, there’s some indication Republicans end their 20 years adherence to GOP party boss Grover Norquist’s “No Tax Pledge.”

             Uncertainty in the markets usually hurts investors, unwilling to take a long-term gamble on the markets.  Given the fragile nature of the U.S. economy, Bernanke sees tax hikes and government spending cuts as potentially plunging the nation into a double-dip recession.  Reporting on his Federal Open Market Committee meeting, Bernanke signaled he’d leave interest rates at around zero percent until 2015 or when the unemployment rate dropped below 6.5% or as long a inflation remains tame.  Holding interest rates steady indicates that Bernanke’s “quantitative easing” [QE3] or Treasury buy-back programs continues to drop long-term rates.  Polls indicate that a narrow majority of economists believe that QE3 hurts economic growth by holding interest rates too low.  Bernanke has insisted that low interest rates spur economic growth by promoting more business activity.

             Bernanke believes that the key to jobs creation and economic growth is keeping interest rates a rock bottom.  Some economists worry that artificially low interest rates fuel inflation, something Bernanke says would trigger higher rates.  Former GOP presidential nominee Mitt Romney and his running mate Rep. Paul Ryan (R-Wis.) insisted that only cutting taxes and government spending can the economy generate more jobs.  While voters disagreed on Nov. 6, Bernanke warned the GOP about their plans to slash government spending.  Employing about 2.2 million employees, the federal government is the nation’s largest employer.  Romney and Ryan’s plan would have tossed thousands of federal workers into unemployment.  While officially neutral, Bernanke has expressed his views that the government should maintain federal spending levels, despite running substantial deficits.      

             When both sides aren’t exploiting the media for their own gain, there’s a possibility of a deal in the works. Neither side wants to be blamed for plunging the economy into another recession.  “We cannot offset the full impact of the fiscal cliff.  It’s just too big,” said Bernanke, warning financial markets that the Fed can only do so much if Washington doesn’t do its job. With QE3 fully in gear and interest rates at rock bottom lows, there’s no more rabbits Bernanke can pull out of his hat.  Engineering a relatively soft landing since the economy collapsed in 2007, Bernanke has won the praise on both sides of the aisle.  If Bernanke really wants to spur economic growth, he should work on new mortgage borrowing regulations that currently lock qualified borrowers out from the housing market.  More home sales would help drive a lasting economic recovery, reducing the need for QE3.

             Bernanke sees sluggish economic growth into the foreseeable future. Keeping interest rates at rock bottom signals that there’s no light at the end of the tunnel when it comes to the economy. Buying up more treasuries and keeping interest rates at zero percent helps spur economic growth but doesn’t tell the whole story.  To assure lasting economic growth and prosperity, Bernanke has to work with Fannie Mae and Freddie Mac to rewrite current mortgage lending guidelines that prevent qualified borrowers from getting home loans.  While there are some signs that real estate is beginning to recover, the Fed must do a better job of making sure that qualified borrowers qualify.  If the real estate market continues its recovery, it should help spur economic growth without the need of more QE3.  As long real estate sales remain anemic, the overall economy will continue to follow suit.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.