CAPITAL
September 14, 2012, 4:15 p.m. ET
Central Bankers' Political Conundrum
By DAVID WESSEL
As Ben Bernanke and Mario Draghi launch historic experiments in central-bank
policy, both men warn that monetary medicine alone isn't enough.
The ultimate cure for what's wrong with the economy, they say, depends on elected politicians.
"Monetary policy, as I've said many times, is not a panacea," Federal Reserve Chairman Bernanke said Thursday, referring to the interest rates the Fed controls and its ability to print money and buy assets. "We're looking for policy makers in other areas to do their part. We'll do our part, and we'll try to make sure that unemployment moves in the right direction. But we can't solve this problem by ourselves."
Mr. Draghi, president of the European Central Bank, said much the same thing a week earlier: "In order to restore confidence, policy makers in the euro area need to push ahead with great determination with fiscal consolidation, structural reforms to enhance competitiveness and European institution-building."
Yet the very actions the Fed and the ECB are taking may relieve pressure on politicians.
.
In the U.S., the Fed's bond buying has, by design, held down long-term interest rates in the bond market and boosted stock prices.
Those are welcome for an economy growing too slowly to bring down unemployment. But the bond-buying makes it easier for Congress to avoid contemplating more short-term fiscal stimulus. And the moves reduce financial markets' pressure on Congress and the president to heed Mr. Bernanke's pleas to fix fiscal policy—to avoid the "fiscal cliff" of tax increases and spending cuts set for year-end and to "simultaneously" act to reduce budget deficits.
.
On the other hand, former Fed staff economist Stephen Oliner figures the central bank's moves will have only "a marginal positive effect on the economy," so a lousy economy will keep pressuring politicians to do something, and fiscal policy is one thing Congress controls.
In Europe, the ECB's new offer to buy more bonds of beleaguered governments that meet certain conditions, has lowered Spanish and Italian borrowing costs even before the bank spends a euro.
Recent history suggests that European leaders, who are coping with domestic political pressures as well as disagreements over budget austerity and European integration, move fastest when a crisis threatens. Of course, the ECB's defenders argue, at combustible moments like today, it is hard to a put a flame to countries' feet without setting them on fire.
There are long-standing differences between the approaches of central bankers on either side of the Atlantic. The ECB, particularly when Jean-Claude Trichet was in charge, saw monetary policy as a lever to get politicians to deliver on promised reforms or budget cuts, effectively delaying monetary ease if politicians procrastinated. The Fed, by contrast, has been more likely to compensate when fiscal policy is off course. Indeed, one reason Mr. Bernanke gave Thursday for stepping up the Fed's bond buying was the "fiscal contraction at the federal, state and local levels."
Messrs. Bernanke and Draghi, who both hold doctorates from the Massachusetts Institute of Technology, are demonstrating one thing to politicians: how to get things done. Both displayed political agility within their institutions by steering their policy committees to endorse massive bond-buying initiatives despite strenuous internal dissent—in the U.S. from some regional Fed bank presidents and in Europe from the German Bundesbank.
Both central bankers are giving their politicians time to get their acts together, though the circumstances differ. Mr. Bernanke is trying to spur an economy that is growing, however slowly. He doesn't have to worry about any of the 50 states abandoning the dollar. Mr. Draghi confronts recession and a fragile banking system—and is trying to keep the 17-country euro zone from disintegrating.
For the Fed, the major risks are that its monetary medicine doesn't work as intended or that extricating itself from very easy credit proves difficult and touches off unwelcome inflation. "The only way history treats him [Mr. Bernanke] badly is if they don't exit soon enough," said economist Anil Kashyap of the University of Chicago Booth School of Business. "The risk for the Fed is that politicians are going to make this so unpleasant for them that when the time comes to raise rates they'll have to do it sooner than they'd like to show they have the will to do it."
The stakes are higher for the ECB. It says it will buy bonds of euro-zone governments only if they commit to budget cuts and reforms. But if it does, and if any government subsequently breaks its promises, the ECB will have to make the tough call of whether to stop buying bonds, which would send borrowing costs of the offending governments soaring.
"Does the ECB have the legitimacy to stop buying?" Mr. Kashyap asked. He is doubtful. "I can't imagine a situation where the ECB can exit." And if it keeps buying bonds of misbehaving governments, he speculated, that could turn German public opinion toward the ECB even more hostile, and perhaps lead Germany to abandon the currency.
Messrs. Bernanke and Draghi are aware of these risks. They obviously think they are worth taking.
.
The ultimate cure for what's wrong with the economy, they say, depends on elected politicians.
"Monetary policy, as I've said many times, is not a panacea," Federal Reserve Chairman Bernanke said Thursday, referring to the interest rates the Fed controls and its ability to print money and buy assets. "We're looking for policy makers in other areas to do their part. We'll do our part, and we'll try to make sure that unemployment moves in the right direction. But we can't solve this problem by ourselves."
Mr. Draghi, president of the European Central Bank, said much the same thing a week earlier: "In order to restore confidence, policy makers in the euro area need to push ahead with great determination with fiscal consolidation, structural reforms to enhance competitiveness and European institution-building."
Yet the very actions the Fed and the ECB are taking may relieve pressure on politicians.
.
In the U.S., the Fed's bond buying has, by design, held down long-term interest rates in the bond market and boosted stock prices.
Those are welcome for an economy growing too slowly to bring down unemployment. But the bond-buying makes it easier for Congress to avoid contemplating more short-term fiscal stimulus. And the moves reduce financial markets' pressure on Congress and the president to heed Mr. Bernanke's pleas to fix fiscal policy—to avoid the "fiscal cliff" of tax increases and spending cuts set for year-end and to "simultaneously" act to reduce budget deficits.
.
On the other hand, former Fed staff economist Stephen Oliner figures the central bank's moves will have only "a marginal positive effect on the economy," so a lousy economy will keep pressuring politicians to do something, and fiscal policy is one thing Congress controls.
In Europe, the ECB's new offer to buy more bonds of beleaguered governments that meet certain conditions, has lowered Spanish and Italian borrowing costs even before the bank spends a euro.
Recent history suggests that European leaders, who are coping with domestic political pressures as well as disagreements over budget austerity and European integration, move fastest when a crisis threatens. Of course, the ECB's defenders argue, at combustible moments like today, it is hard to a put a flame to countries' feet without setting them on fire.
There are long-standing differences between the approaches of central bankers on either side of the Atlantic. The ECB, particularly when Jean-Claude Trichet was in charge, saw monetary policy as a lever to get politicians to deliver on promised reforms or budget cuts, effectively delaying monetary ease if politicians procrastinated. The Fed, by contrast, has been more likely to compensate when fiscal policy is off course. Indeed, one reason Mr. Bernanke gave Thursday for stepping up the Fed's bond buying was the "fiscal contraction at the federal, state and local levels."
Messrs. Bernanke and Draghi, who both hold doctorates from the Massachusetts Institute of Technology, are demonstrating one thing to politicians: how to get things done. Both displayed political agility within their institutions by steering their policy committees to endorse massive bond-buying initiatives despite strenuous internal dissent—in the U.S. from some regional Fed bank presidents and in Europe from the German Bundesbank.
Both central bankers are giving their politicians time to get their acts together, though the circumstances differ. Mr. Bernanke is trying to spur an economy that is growing, however slowly. He doesn't have to worry about any of the 50 states abandoning the dollar. Mr. Draghi confronts recession and a fragile banking system—and is trying to keep the 17-country euro zone from disintegrating.
For the Fed, the major risks are that its monetary medicine doesn't work as intended or that extricating itself from very easy credit proves difficult and touches off unwelcome inflation. "The only way history treats him [Mr. Bernanke] badly is if they don't exit soon enough," said economist Anil Kashyap of the University of Chicago Booth School of Business. "The risk for the Fed is that politicians are going to make this so unpleasant for them that when the time comes to raise rates they'll have to do it sooner than they'd like to show they have the will to do it."
The stakes are higher for the ECB. It says it will buy bonds of euro-zone governments only if they commit to budget cuts and reforms. But if it does, and if any government subsequently breaks its promises, the ECB will have to make the tough call of whether to stop buying bonds, which would send borrowing costs of the offending governments soaring.
"Does the ECB have the legitimacy to stop buying?" Mr. Kashyap asked. He is doubtful. "I can't imagine a situation where the ECB can exit." And if it keeps buying bonds of misbehaving governments, he speculated, that could turn German public opinion toward the ECB even more hostile, and perhaps lead Germany to abandon the currency.
Messrs. Bernanke and Draghi are aware of these risks. They obviously think they are worth taking.
.
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