Ben Bernanke and Jean-Claude Trichet have a message for politicians: Stop putting all the burden of saving the world economy on the backs of the central banks.
The world's two most powerful central bankers, in separate testimony Tuesday, tried to persuade their political masters to end their bickering and come up with definitive plans to ease uncertainty over policy and boost economic growth.
Mr. Bernanke, the chairman of the U.S. Federal Reserve Board, called on lawmakers to refrain from cutting spending too quickly, while Mr. Trichet, the president of the European Central Bank, said European governments must agree on a rescue program that is big enough to support cash-strapped governments and banks.
“Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” Mr. Bernanke said in his opening statement to the congressional Joint Economic Committee on Capitol Hill.
Mr. Trichet, for his part, chided the European Parliament in Brussels for favouring financial rescue schemes that would rely heavily on the resources of the ECB. He said he opposes turning Europe’s€440-billion ($617-billion) bailout fund into a bank so it could secure access to ECB loans, thus expanding the fund’s firepower.
The ECB already is buying the debt of Italy and other European countries, and Mr. Trichet’s remarks suggest the central bank will be a reluctant participant in future programs that go beyond its core mandate of containing inflation.
“I would say it is their responsibility to face up to the worst financial crisis since World War II,” Mr. Trichet said, referring to the governments of the euro zone, which have been struggling for more than a year to come up with a convincing backstop for the region’s debt-heavy countries and financial institutions. “We [in the euro zone]are the epicentre of this global crisis.”
The financial crisis pushed both the Fed and the ECB into uncharted territory, forcing them to test the limits of monetary policy to provide ballast for their struggling economies and calm volatile financial markets. This has forced the central banks uncomfortably into the spotlight, especially as U.S. legislators squabble over the appropriateness of further stimulus and European legislators balk at bailing out troubled states and banks.
Mr. Bernanke is increasingly trying to stir a stronger legislative response to the weakening economy by becoming more explicit about the threats he sees on the horizon. On Tuesday, he told lawmakers that the recovery is “close to faltering,” and last week he told an audience in Cleveland that the country’s persistently elevated unemployment rate represented a “national crisis.”
While the Fed continues to project faster economic growth over the remainder of the year than in the first half, Mr. Bernanke told the joint committee that the central bank now expects the rebound to be slower. Consumer confidence has been battered by high unemployment and a volatile stock market, crimping spending, Mr. Bernanke said. At the same time, the real estate market, which typically pulls the economy out of recession, this time “isn’t doing anything,” he said.
The Fed chief explicitly called on lawmakers to do more. Mr. Bernanke advised them to agree on a plan that would constrict the budget deficit over the longer term, while remaining supportive of economic growth in the present. He noted that mass layoffs by state and local governments are contributing significantly to the high unemployment rate.
However, there were few outward signs of a willingness on the part of Democrats and Republicans to co-operate.
In Dallas, U.S. President Barack Obama pressed Congress to pass his economic stimulus plan. But back at the Joint Economic Committee, Republican members expressed concern over the Fed’s use of unconventional policy, including its most recent attempt to lower longer-term interest rates by selling from its holdings of short-term debt to buy securities with durations of six years to 30 years.
Like it or not, Mr. Bernanke’s Fed will likely continue to be the only source of economic stimulus, analysts said.
“With Congress so hopelessly split on those difficult long-term decisions, we doubt that Bernanke will get his wish this side of next year’s presidential election,” said Paul Ashworth, the Toronto-based chief U.S. economist at Capital Economics.