Daily Archives: July 17, 2012

Ben Bernanke, chairman of the Federal Reserve, delivered on Tuesday a remarkably timid policy statement to Congress. This may reflect a hesitation to front run the FOMC, his policy-making committee, which next meets on August 1st. But the main culprit is probably elsewhere. The Fed increasingly finds itself in a large and deepening policy dilemma.

Mr Bernanke devoted almost the entirety of his written statement to recent economic and financial developments. Though he did not go far enough, he rightly emphasized what is now more than evident in recent data releases, including Monday’s retail sales numbers: America’s already inadequate recovery is weakening in the context of an increasingly synchronized global economic slowdown.

Look for the Fed in the next few weeks to go further in revising down its job, growth and inflation forecasts for 2012. Given the institution’s dual mandate of price stability and maximum employment, this will inevitably raise expectations of additional policy activism.

Having exhausted long ago the effectiveness of traditional monetary policy tools, the Fed has no choice but to consider another mix of unconventional measures – specifically, additional purchases of securities, a lower interest rate on excess reserves, an even more aggressive communication policy, and enhanced access to the discount window.

But, more of the same will not have a durable beneficial impact, especially if other policymakers remain missing in action. Indeed, the advantages of another round of unusual Fed activism are declining while the risk of both collateral damage and unintended consequences is material and growing.

The Fed is stuck in a widening dichotomy between the need for a policy response and an increasingly impotent tool kit. I suspect that Bernanke and his colleagues recognize that their policy effectiveness is waning. Yet, understandably, they are unwilling to stand idle given the paralysis in virtually every other part of the economic policy apparatus.

In the meantime, too many politicians seem willing to maintain the myth that the Fed can lead the domestic economy out of its current malaise. It cannot. The best it can do is slow a de-leveraging that, in the absence of proper growth dynamics, eats away at the traditional resilience and entrepreneurship of the US economy.

Recognising this, Congress should be doing much more to awaken other policymakers from their deep slumber. This requires the type of constructive political interaction that has eluded the US for almost the duration of the current term of congress. And there is little to suggest that this will change any time soon, and certainly not before the November elections.

It should therefore come as no surprise that, in their meeting with Mr Bernanke on Tuesday, members of congress showed little interest in internalizing their need to respond quickly to economic priorities. Instead, they diverted the discussion to other issues that, while topical and important, do little to advance the policy agenda and improve the outlook for hundreds of millions of Americans.

So, was Bernanke’s trip to Congress a complete waste of time? No. Hopefully, members of Congress will take seriously his attempt to humanize the risks associated with an urgent policy challenge – that of America avoiding going over the fiscal cliff.

Citing the Congressional Budget Office, Mr Bernanke noted that Congress’s failure to deal with the full range of programmed and blunt tax increases and expenditure cuts would lead to a “shallow recession” next year and, most importantly, “1 ¼ million fewer jobs … created in 2013.”

Given global connections and Europe’s persistent crisis, even this Mr Bernanke warning may be too sanguine. The last thing the US needs is another blow to an unemployment rate that remains way too high, and that involves a damaging component of long-term joblessness in the context of overly-stretched social safety net.

It’s not easy being a former president. The old joke is that ex-presidents are like Chinese vases: everyone says they are very valuable but no one knows what to do with them. Some, like Bill Clinton, continue with a frenetic flurry of activity, others such as Vladimir Putin, do not actually relinquish power while those such as Silvio Berlusconi seem to treat their post-presidential time as a hiatus before running for office again.

Recently, the two best known former presidents of Brazil took part, almost simultaneously, in events that clearly illustrate very different ways of living the ex-presidential life. Fernando Henrique Cardoso won the Kluge Prize, one of the world’s most important awards in the social sciences. This $1m prize is awarded by the Library of Congress of the United States and has a nomination and selection process as rigorous as that of the Nobel prizes.

The jury emphasised that the award recognised Mr Cardoso’s intellectual achievements. Before entering politics he was an internationally recognised sociologist who made pioneering contributions on the relationship of inequality and racism to under-development. He was also the father of the once popular “dependency theory”, which holds that under-development is partly caused by the richest countries as a result of the exploitative relations they established with poor countries. This idea is no longer in favour and Mr Cardoso himself recognises that the world has changed and that its conclusions are no longer valid.

About the same time that Mr Cardoso was being feted at the US Library of Congress,  Luiz Inácio Lula da Silva spoke by video conference to the participants of the Sao Paolo Forum who were meeting in Caracas. The Forum is a gathering of Latin American leftist organisations that meets periodically since it was launched by Mr Lula’s political party, the PT (The Workers Party) back in 1990.

In his televised address Lula said, “Only thanks to [Hugo] Chavez’s leadership, the people have had extraordinary achievements. The poor were never treated with such respect, affection and dignity. These achievements should be preserved and consolidated. Chavez, count on me, count on the PT, count on the solidarity and support of every leftist militant, every democrat and every Latin American. Your victory is our victory. ”

It is perfectly legitimate for Mr Lula to express his affection and admiration for Mr  Chavez. Affects – like love – are blind and deserve respect. But it is not legitimate for Mr Lula to intervene in another country’s elections. That’s not what democrats do. And Mr Lula knows it. Or he should know it. But he seems oblivious to this and in fact it is not the first time that he bluntly intervenes in Mr Chavez’s favor during a Venezuelan election. In 2008, on the eve of a critical referendum, he also intervened in the process, claiming that Mr Chavez was “the best president the country has had in 100 years”.

Nor is it legitimate to distort, as Mr Lula did, the Venezuelan reality – especially that of the poor. Mr Chavez has had a devastating effect on Venezuela and the poor are the main victims. It is they who pay the consequences of living in one of the world’s most inflationary economies; they are the ones having to make ends meet with a real wage that has fallen to its 1966 level (yes, 1966). It is they who cannot get jobs unless it is in the public sector and only if they are deemed loyal to the revolution and are willing to display publicly and often their unwavering support for el comandante. It is they who see their sons and daughters killed at one of the highest rates of homicides in the world.

No wonder, therefore, that in the last parliamentary elections in 2010 more than half of the votes were against Mr Chavez. In Venezuela it is impossible to reach that percentage without the votes of millions of the poorest – the very people that according to Mr Lula are doing better than ever thanks to Mr Chavez. And, finally, it is not legitimate for Lula to applaud and encourage in another country public policies that are diametrically opposite to those he implemented with great success as Brazil’s president.

In this sense, perhaps Lula would be well advised to do as former president what he did as president: follow Mr Cardoso’s example. After all, Mr Lula knows that his success as president owed a great deal to his decision to continue and even expand his predecessor’s economic and social policies. Mr Lula should take his post-presidential clues from Cardoso and understand that a true democrat does not use his prestige and influence as a former president to improperly intervene in another country’s elections.

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