Monetary patience

Fully aware of the dominant role that the Federal Reserve plays in the US economy, Chairman Ben S. Bernanke warned Congress on Wednesday of the grave risks inherent in the premature withdrawal of monetary stimulus. Under the current policy, the Fed buys $85 billion in US bonds each month while keeping interest rates between zero and 0.25 percent. Bernanke knows that a tightening of that monetary policy would kill off his strategy for growth and job creation; he also knows that inflation hardliners want to bring an end to this abundance of liquidity, even though the situation seems to be perfectly under control. The Fed’s critics insist that, unless there is a change of course, sooner or later bubbles will emerge in the markets — a risk that is genuine — putting the whole strategy for economic recovery at risk.

Bernanke did not issue a warning over the early removal of stimulus measures just because he felt like it. The global economic climate is a complex one; it could be said that things are moving at three different speeds. Asia is expanding at a faster pace than the United States and Latin America, while this latter bloc is certainly growing more than Europe. Overall, the 10 biggest economies in the world are growing more slowly than the emerging nations. This is the way things seem set to continue in the medium term in the context of a generalized deceleration as the recovery falters, despite the fact that five years have passed since the collapse of Lehman Brothers.

It is worth noting what the reasons for this cooling off are in order to properly understand Bernanke’s fears. The main cause is that the biggest global economies are engaged in a process of deleveraging, both in the corporate and household sectors. This effort to reduce debt is a result of low expectations on the part of companies and consumers. Rightly, Bernanke believes that monetary stimulus (and a generous budget, something which is impossible today due to the rift between Democrats and Republicans) must be maintained until the outlook changes and economic agents decide to invest once more. Replacing the current monetary relaxation with a more restrictive policy would only postpone that recovery.

The Fed’s policy takes into account more factors than the European approach of fiscal rigor. Although it is not without risks, Bernanke’s plan stands a greater chance of succeeding than the direction recommended by the Bundesbank. Of course, the United States has a great advantage: its economic policy is designed for one country only. Europe’s economic policy has to be applied to 17 or 27 states, depending on how you look at it. Bernanke is working for interdependent and mutually supportive states, where debts are covered when necessary (California); the European Central Bank’s Mario Draghi walks a torturous path through a territory in which no one, least of all Germany, is prepared to bail out their neighbor.