Bernanke just blew two big holes in sequester debate

The Fed chairman made a simple argument -- the cuts are ill-timed in the middle of a sluggish recovery.

By The Fiscal Times Feb 26, 2013 4:41PM
The Fiscal Times logoBy Josh Boak

Federal Reserve Chairman Ben Bernanke just blew two big holes in the political argument about the $85 billion in automatic across-the-board spending cuts slated to begin this Friday.

Testifying before the Senate Banking Committee morning, Bernanke made a simple argument: The sequestration cuts are ill-timed in the middle of a sluggish recovery and changing the composition of those cuts does little to mute their overall drag on the economy.

"It was done to be 'Dr. Strangelove,'" said Bernanke, referring to the Stanley Kubrick film about mutually assured nuclear destruction.

All of this matters because the political debate has largely been about cuts to the programs, not the timing of those cuts. President Obama has warned of teachers and civilian Pentagon employees being fired -- a danger he'll repeat in a speech this afternoon at a shipyard in Newport News, Va. Obama has suggested that revenue increases from eliminating tax breaks on wealthier Americans and closing loopholes on companies should replace some of the cuts. GOP congressmen say the tax hikes would choke off growth.

Either way, it's just shuffling numbers across the federal ledger, Bernanke essentially said. The economy would still suffer a projected 0.6% hit to gross domestic product.

"The near-term effect on growth would probably not be substantially different," Bernanke said. "It would be about the same." On Tuesday, Bernanke said it's the difference between a tottering 2% economic uptick and a more robust 2.6% increase that would in theory ramp up hiring.

In an era of staggering gridlock, the Fed chairman's framework for explaining the policies outside his realm -- those set by Congress and Obama -- have been remarkably prescient.

Federal Reserve Building Hisham Ibrahim CorbisFor the better part of the past two years, Bernanke has warned Congress about how their policies have injured growth. The Fed chairman popularized the term "fiscal cliff" in testimony last year, the metaphor that defined the political struggle over tax rates at the end of last year by the White House and Capitol Hill.

The Fed Chairman's testimony also dwelled on financial regulation, the Fed's huge balance sheet, inflation risks, and a 30,000-foot perspective on the global economy. Yet those issues pale, for the moment, in comparison to the economic difficulties caused by the recent political stalemate.

Bernanke can't and doesn't tell Congress what fiscal policies to adopt, but he has noted how the gridlock has undermined the Fed's low interest rates and attempts at monetary stimulus. His line of thinking is that stronger economic growth produces more jobs and income -- which in turn lead to more revenues and less demand on government social programs. Our fiscal and monetary policy should be working in concert.

All told, government policies to reduce the deficit this year are forecast to hurt growth by 1.5%. This includes spending reductions besides the sequester, the end of the two-year payroll tax holiday, the 3.8% investment tax on high income earners, and to a lesser extent the fiscal cliff compromise that charges higher tax rates on household incomes above $450,000.

The Fed cannot offset that hit to the economy, Bernanke said this morning.
The flaw in the urgency to cut the deficit is that it stifles growth and the real deficit problems mount exponentially after 2022, when the Baby Boomer generation segues onto Medicare and Social Security, causing entitlement expenses to surge.

"To some extent, the fiscal policy decisions being made are mismatched with the timing of the problem," Bernanke said.

Josh Boak is a National Correspondent at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.

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46Comments
Feb 26, 2013 5:47PM
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Oh come on, the Fed's creating $85 billion a month in liquidity and we're cutting spending by $85 billion a year. That's a totally stupid argument and everyone that'll think about it has to agree. We need. to cut about $200-300 billion a year so the Fed doesn't have to keep barrowing at these levels and it doesn't really matter if it's defense welfare, education welfare, housing welfare or science welfare that gets axed.  The best thing is across the board cuts so everybody feels some pain like all of us that had our houses and savings cut by 10-20% over the last 3-4 years.
Feb 26, 2013 5:54PM
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Funny how government creates the problems they later have to solve.     Justifying their worthless size and purpose. 
Feb 26, 2013 5:24PM
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Wow, if it's such a bad idea, why did Obama come up with it?  I mean, he's got a cabinet and he's got good ol' Ben there advising him. Why did he come up with this proposal if it was going to make the world start spinning backwards?

Feb 26, 2013 5:26PM
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85 billion is a drop in the bucket to overall federall spending.  it will have an affect because everyone is afraid it will. Point is with not spending on wars in the middle east Defense spending should drop 20B alone for 2013. The rest is less than 1% of federal spending
Feb 26, 2013 6:02PM
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Sorry Ben, at this point, like all other Keynesians, your credibility and opinion are both worthless.
Feb 26, 2013 4:47PM
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Failure, the new American standard.......
Feb 26, 2013 7:31PM
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The 1 trillion dollar deficits are ill timed in a sluggish economy.
Feb 26, 2013 7:28PM
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Remember what Pelosi said. "We do not have a spending problem. We only have a revenue problem". Yes, that is our leadership. If we tax the rich 100% we do not come out of this.
Feb 26, 2013 5:34PM
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A simple argument is all that he is capable of. 
Feb 26, 2013 7:57PM
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Of course the timing is bad - when is taking back money previously given a good thing!  How much are we paying this guy and all he can come up with is to borrow more and print more money?  All the administration and Congress can do is complain about each other.  The Government is definitely a 'fine' role model for our children - they are teaching them it is OK to lie, borrow and spend beyond your means, blame others when something does not go their way, and get over on your neighbor every opportunity you can.  
Feb 26, 2013 6:25PM
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My understanding is if we dont make some reduction of debt, we will be downgraded again.
Feb 26, 2013 11:26PM
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Wrong...it is a reduction in the increase in spending, not a spending cut!
Feb 26, 2013 11:08PM
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The so called sequester is $85 billion and he says the country will come to a halt?
They just spent $60 billion on hurricane Sandy aid...
Obama's cabinet is in charge of what and where things get cut, there are a lot of low impact departments and programs that could be put on hold, not the critical services he keeps bellowing about.
It's all politics, campaigning still, and nothing to do with benefiting the nation.
Obama's frustrated by the republican house and he'll be pulling all the stops in electing a democratic congress so he can have free REIGN for his last two years.
Think Health care was jammed through?
I'd hate to see what's next in store if they do get control again.
The end will justify the means, say what it takes to get elected - then do what you want afterward.

Feb 26, 2013 11:01PM
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This is not a hit to the economy, it is a shot in the arm!   We reduce GOVERNMENT that produces no growth, profit or sustainable demand, and replace it with PRIVATE sector spending, which produces products people are WILLING to buy, creates real demand (read JOBS) and real profits and growth!

 

The main difference is the MONEY that people earn is spent by those that earn it rather than being seized from them to distribute to the leech class...

 

The more we cut from government the BETTER off the economy and MIDDLE CLASS will be.

Let this 85 billion be the first of 850 billion!   If we slash 850 Billion we will be where we were when the imbecile Obama took office!

Feb 26, 2013 7:12PM
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Ben needs to take a math class.  The feds just sent about $70B to the northeast for hurricane relief.  The current year federal budget went UP by about $15B (after the $85B reduction to take place March 1).  That adds up to a $85B spending increase., not a decrease as some would suggest.  Come on Ben, stop carrying water for Obama. 
Feb 26, 2013 7:24PM
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All I heard was more lies and coverups from this ship sinker!!
Feb 26, 2013 7:48PM
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almost zero interest rates for savers fo 5 years now. Banks and there CEO's get millions in bonus, for there performances?????? Yet people that need the savings accounts to at least keep pace with inflation for the last 5 years have suffered. Ben has the idea that he can control hyper-inflation when it comes. So did Japan in the 90's look around and see if things are going up in leaps right now. Food. gas, taxes, clothing and the list goes on. Ole Ben has had the last 5 years to prove his zero interest theory and it hasn't helped at all. Still high unemployment, housing barely holding it's own and no new jobs. A first year economist knows you cant spend more than you take in. I think ego is the only thing he has gotten right in a long time.


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Bernanke still does not understand economics. Nor do any of the so called economic leaders and advisers out there.

 

Basically even Hitler understood economy much much better than anyone today. He was facing hyperinflation and in response kicked the Wall Street Bankers out of his country and put everyone back to work and go his economy turned around in like 2 years as he was elected in 1934 I think and in 1936 got an economic award from the other countries of Europe for turning the German Economy around.

 

Pretty Bernanke is merely resupplying our Wall Street bankers with more money which only makes matters worse and does nothing for the working class.

 

Gee Bernanke monetary policy had nothing to do with getting us out of the Great Depression.

 

Hitler saved us from the Great Depression by forcing our Wall Street bankers to be afraid of their lives and opening up their pocket books and taking men out of soup lines and putting them in assembly line building war machines to take out Hitler. It was the hiring of tens of millions of unemployed Americans and under employed Americans in factories across America and growing food for the war effect and machines for the war machine that turned the US around.

 

It was not monetary policy which had us stuck in the Great Depression.

Feb 26, 2013 6:07PM
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Well it will go down like this! It will be voted down by the House, to protect Boehner and the Senate will approve a deal with the moderates Rep voting for it. McCain, Collin,. Flake and Graham voting for it to save the nation.

Big Ben will print more money and inflation will grow to about 17% over the next few month till they can create another crisis .

Feb 27, 2013 1:25AM
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When you're saying that you can't cut 85 billion out of a trillion dollar plus deficit, that's the problem. This is still no more than kicking the can down the road. As many posters stated, we just spent 60 billion in unexpected Hurricane Sandy aid and there was little talk of shuttering the doors. Let's get real about this whole thing, The admin. just doesn't want to do it and they'll spend millions trying to stop it. Just like the ACA. Most still don't like it, don't want it, but it's the law of the land. Well, sequestration is also. Congress passed it, BO signed it. If it was so bad, why did they do it?
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