Capping a yearlong campaign, Federal Reserve Chairman Ben Bernanke will get one last chance on Wednesday to talk Washington down from the “fiscal cliff.”
The Fed chairman was one of the first to identify the scheduled mix of tax increases and automatic spending cuts as a fiscal contraction that could wreak havoc on the economy, coining the term “fiscal cliff” at a February hearing of the House Financial Services Committee.
“His comments have adequately raised the pressure on policymakers to resolve this self-inflicted wound, which he knows as well as anyone is the last thing the economy needs right now,” said Jared Bernstein, a former economic adviser to Vice President Biden who is now a senior fellow at the Center on Budget and Policy Priorities.
“Bernanke is the economy’s lead referee, and it’s reasonable for him to call unnecessary roughness.”
Bernanke has been one of many nonpartisan voices, including the Congressional Budget Office, to warn of the recession that would likely result from going over the cliff.
But experts said the Fed chairman’s understated but relentless public-relations campaign has been among the most effective.
“He’s certainly raised the level of understanding on the negative economic impacts of going over the cliff,” said Phillip Swagel, a professor at the University of Maryland’s School of Public Policy who served as the Treasury’s assistant secretary for economic policy under Hank Paulson. “That’s what he intended to do, and he succeeded.”
Bernanke took the Fed into uncharted territory in his efforts to keep the financial system afloat during the 2008 meltdown, authorizing broad action to support the nation’s largest financial institutions. Then, defying criticism and warnings from the GOP, Bernanke embarked on unprecedented acts of stimulus to support the economy through bond buys.
Through it all, Bernanke has worked to maintain the central bank’s apolitical stance.
He has refused to be dragged into the debate between Democrats and Republicans over taxes and spending, holding firm to the simple message that the fiscal crisis can — and should — be averted.
“I’ve been assigned to focus on maximum employment and price stability, not to hold threats over Congress’s head,” he said in July. “Congress is in charge here, not the Federal Reserve.”
Some see Bernanke’s resistance to dive into policy specifics as a missed opportunity, given his expertise and influence.
“He’s such a clear thinker … it’s too bad that he’s not willing to engage in the discussion,” said Swagel. “His voice would carry weight if he could weigh in.”
While the Fed does not typically delve into politics, chairmen have in the past dipped their toe into policy debates. Former Fed Chairman Alan Greenspan threw his support behind the tax cuts passed under President George W. Bush — the same tax policies that have become central to the debate over the fiscal cliff. After leaving the Fed, Greenspan urged that the cuts be allowed to expire in 2011.
Not everyone believes Bernanke’s contributions to the fiscal debate have been productive. Some say the Fed’s extreme efforts to drive interest rates as low as possible have taken heat off of policymakers to do what needs to be done on the fiscal front.
“What wakes up Greece or Italy … is when their borrowing costs shoot up. Well, we’ve got the Fed purchasing about two-thirds of the Treasurys put on the market every month,” said Mark Calabria, director of financial-regulation studies at the Cato Institute. “If anything, his actual behaviors have facilitated the mess. … He’s made it easier for them not to act.”
Calabria also noted the concern over the use of the term “fiscal cliff,” which Bernanke popularized. Some have argued a more accurate term might be a “fiscal slope” or “fiscal obstacle course,” warning that the “cliff” metaphor might overstate how immediate the impact of the policy changes will be.
“Has it gotten so blown out of proportion that it has spooked the public?” Calabria asked. “To some extent, he bears some blame for hyping the issue.”