If the Fed Can’t Save Us, Then Who Can?

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Chris Rank / Bloomberg

Fed-watchers may recall that in my last post, I courageously risked my membership in the Ben Bernanke Fan Club by asking the chairman why he had failed to juice the economy enough to avoid sky-high unemployment. The boring answer, I suspect, is that he’s skeptical additional monetary stimulus would help create many jobs, although I don’t expect him to put it quite that starkly at his first-ever press conference on Wednesday afternoon.

But I also promised a follow-up question, and it might even interest normal people who pay no attention to the Fed: Mr. Chairman, if the Fed is done with monetary stimulus, do we need Congress to inject more fiscal stimulus?

If so, why haven’t you pushed for it? And why haven’t you pushed back against the current mania for short-term budget cuts that could slow recovery at the margins?

On the other hand, if you don’t think we need more monetary stimulus or more fiscal stimulus, and you still think unemployment is our biggest problem, are we just screwed?  Are the unemployed on their own?

Again, I can guess his answer: He doesn’t want to tell Congress how to do its job.  But he’s been outspoken about the need for medium-term fiscal sanity, while making it clear that he’s not telling Congress whether they should get there through tax increases or spending cuts. He’s been much quieter about the need for short-term fiscal stimulus, or at least the need to avoid short-term anti-stimulus.

Stephen Gandel over at our sister-brother-whatever blog The Curious Capitalist anticipated my follow-up, suggesting that insufficient fiscal stimulus is the real problem with the economy, and that President Obama rather than Bernanke is to blame.  Since I’m even deeper in the tank for Obama’s $787 billion stimulus package (here’s Exhibit A;  here’s Exhibit B; here’s Exhibit C — I can do this all day) than I was for Bernanke before I betrayed him, I should say that Gandel is blaming the victim. Obama wanted a bigger stimulus in 2009—even though the Recovery Act was bigger in inflation-adjusted dollars than the entire New Deal—but he had to pare it back a bit as a price for three Republican votes in the Senate.

Anyway, Bernanke is a Republican, but like Obama and the White House economic team, he’s a card-carrying Keynesian; he better be, after injecting more monetary stimulus into the economy than any Fed chair in history. He accepts the counterintuitive idea that government should loosen its belt when families and businesses are tightening theirs. He did offer mild encouragement for Obama’s original stimulus, but since then, as Keynesians have clamored for more and the administration has proposed various pump-priming schemes—tax cuts for small businesses, state aid to save teacher jobs, a big infrastructure spending initiative and finally the bipartisan tax-cut deal that passed last December–he’s been quiet.

Monetary policy and fiscal policy are both full of complexities.  But at some level they both involve fairly simple binary decisions: Do we need more gas or is it time to apply the brakes? It’s legitimate to worry about what monetary or fiscal stimulus could do to inflation expectations, the strength of the dollar, potential Fed exit strategies and the uncertainties created by federal budget deficits. I’ve made it abundantly clear that I think Bernanke helped save us from a second depression.

The current situation is definitely better than a depression.  But it’s not good! The Fed has a dual mandate to stabilize prices and maximize employment, and one of those mandates is not being achieved. It’s hard to imagine that Bernanke thinks the economy is in much danger of overheating.  So why isn’t anyone giving it gas?