Bring Back Keynes

By Reuters -  |  Posted 2008-01-16 Print this article Print

Ben Bernanke has tried hard not to follow his predecessor Alan Greenspan into the political arena by commenting on fiscal policy, but the Federal Reserve chief will find it difficult to stay above the fray.


President George W. Bush has said he was considering whether the economy was in need of a fiscal boost, and lawmakers of both parties have begun to scramble to consider what might be done.

The U.S. Congressional Budget office said on Tuesday that a well-designed stimulus package that got money into the hands of lower- and middle-class families, who are the most likely to spend it, would stand the best chance of working.

Greenspan drew heavy fire for backing the tax cuts Bush proposed in 2001 while he was Fed chairman and Bernanke said right from the start that he would take a different tack.

"Given the uncertainty around monetary policy, it doesn't help him (Bernanke) to get embroiled in a political controversy over fiscal policy," said Tom Gallagher, senior managing director at ISI Group in Washington.

"He will avoid going as far as Greenspan did, but it will be hard for him to stay out of the debate entirely," he said.

Asked about fiscal policy during his Senate confirmation hearing in November 2005, Bernanke pleaded it was not his business.

"I believe that it is within my purview to discuss broad issues of the share of government spending and (Gross Domestic Product), the share of taxes and GDP, deficits, fiscal stability, those issues," he told the Senate Banking Committee, adding: "What I would like to do is to refrain from making recommendations on specific matters of taxes and spending."

So far, Bernanke has mainly stuck to broad observations: balanced budget good, deficit bad; reform Medicare and Social Security while there is still time. In fact, his congressional testimony last January was all about the need to tackle rising entitlement spending.

He has managed to dodge specific recommendations on how best to balance taxation and spending — intrinsically political issues — but will find it hard to duck a topic that has become central in the 2008 presidential election campaign.

"This falls under the heading of short-term macro management and that is the Fed's business," said Lou Crandall, chief economist at Wrightson-ICAP in Jersey City, New Jersey.

As apolitical as the Fed chairman tries to remain, he cannot ignore what is going on in Washington. Nor can he afford to be entirely agnostic about the perils of blocking a fiscal boost if there is some chance that it might help offset a recession for which he would otherwise be blamed.

"He is not going to take sides on how to split up the pie, and I think his advice is going to be to go slow, because a fiscal stimulus package may not be needed ... but I don't think he wants to stand in the way of one," Crandall said.

(Additional reporting by David Lawder, Donna Smith and Rick Cowan; Editing by Andrea Ricci)

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