Bernanke warns of Congress inaction over

18th July 2012

"The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence," Ben Bernanke told Congress Tuesday.

Bernanke's pleas come on the heels of a report by Morgan Stanley in which it anticipates that the so-called ‘fiscal cliff' would represent a 5 percent drag on gross domestic product. The report said: "While our analysts are somewhat less worried about the impact of European bank strains, the negative impact of fiscal cliff uncertainty is becoming more widespread."

Furthermore, in a study conducted on behalf of Aerospace Industries Association, two academics, Dr. Stephen S. Fuller and Dwight Schar, found that 2.14 million American jobs could be lost if the Budget Control Act's sequestration mandate takes effect on January 2, 2013. That is the date that budget cuts of $1.2 trillion start throughout government unless Congress and the administration agree on a solution.

"The results are bleak but clear-cut," said Fuller. "The unemployment rate will climb above 9 percent, pushing the economy toward recession and reducing projected growth in 2013 by two-thirds.  An already weak economy will be undercut as the paychecks of thousands of workers across the economy will be affected from teachers, nurses, construction workers to key federal employees such as border patrol and FBI agents, food inspectors and others."

Politics of QE3

Meanwhile, even as Bernanke gave no indication as to whether the Fed would take additional steps to boost the economy; Justin Lahart of the WSJ says electoral politics could pose a potential problem for the Chairman in his decision-making.

"With long-term rates already at historic lows, it is hard to claim that it is needed to make debt even cheaper. The main aim of QE3 likely would be to push investors into stocks and other risky assets. The trouble is, artificially juicing a stock market, which is only a few percentage points off its recent highs, would be controversial for the independent Fed heading into November's elections."

"Nobody really believes the Fed's well-worn protests that it doesn't weigh politics in its decision-making process. However, if the Fed thinks it should move but doesn't, it would open itself up to a different kind of onslaught. While some Fed members will continue to worry that more QE could carry as many risks as benefits, the politics of the situation argue that if the Fed is going to launch QE3, it will do so at its two-day meeting that concludes Aug. 1.

"After all, the last thing Mr. Bernanke wants is for Fed-obsessed markets to de disappointed, only to force another round of QE even closer to the election."

More on Mindful Money

Intro: The end of economics as we know it

Part 1: What's wrong with neo-classical economics? 

Part 2: The decline and fall of neoclassicism  

Part 3: The rise of the New Economists – key players and ideas 

Part 4:  Conclusion: Bye Bye Laputa?

EXTRA

20 'New Economics' sites you should read

The Financialist

26 thoughts on “Bernanke warns of Congress inaction over”

  1. Drf says:

    What a shower of liars and cheats!!!

  2. Justathought says:

    Hi Shaun,

    I really appreciate all your efforts to enlighten us; I never believed in any conspiracy theories etc… however I wonder what is actually happen in UK isn’t it a part of some logic as suggested by the latest IMF’s report largely occulted by the Cyprus event…? Isn’t Merving King member of the Basel and Bilderberg comities…? I have to point out that by early 2014 we probably will wake up in a very different world…

    The new Single Supervisory Mechanism (SSM), the EU-wide banking regulator under the ECB, to be operational by early 2014, would have to have real teeth, along with expertise, the IMF pointed out. It should regulate all banks in the Eurozone “to sustain the currency union” and in the entire EU to sustain “the single market for financial services.” In other words, without the SSM, the currency union won’t make it.

    But the IMF’s killer app is the Banking Union, a “single framework for crisis management, deposit insurance, supervision, and resolution, with a common backstop for the banking system.” Under this system, taxpayers in all Eurozone countries would automatically be responsible for bailing out banks,
    their investors, bondholders, counterparties, and account holders in any
    Eurozone country.

    In the process, countries would surrender much of their authority over
    banks—and how or even whether to bail them out—to this new instrument. Decision makers would be Eurocrats, far removed from any popular vote. Victims would be the people who’d end up paying for it. Investors and speculators would profit. Other beneficiaries would be politicians who’d no longer have to bamboozle voters into bailing out banks because it would be done by a distant power.

    Sure many folks didn’t expect this…, did they?
    Wouldn’t you make this up…, would you?

    http://www.testosteronepit.com/home/2013/3/16/imf-eurozone-banks-are-in-trouble-trample-taxpayers-and-demo.html

    http://www.imf.org/external/pubs/ft/scr/2013/cr1375.pdf

    1. Alex says:

      Hi Justathought,

      I am the balance to you as increasingly the mainstream media makes little sense of the world around us. Gordon Browns proclamation ‘that no one could have seen the crash coming in 2008’ is bogus, There are more then enough alternative media people who did. Many talking heads on normal media channels spin and outright lie as to events and their implications.

      Indeed using ‘alternative media’ as it yields a better fit/ representation of events, isn’t that why your here on this blog? and you are only one step away from ‘conspiracy theories’ and having taken an arm chair interest in conspiracy theories over what must be more than five years now, they make even greater sense.

      The difference seems to be I am the only person I know who looks at a conspiracy theory before making a decision on it where everyone else gives their opinion before looking and having done so, doesn’t look at them anyhow, preferring to spend another hour watching another repeat of Only Fools and Horses they’ve seen before.

      “What luck for rulers that men do not think” – Adolf Hitler

      http://www.concept9.co.uk

      1. Justathought says:

        Hi Alex,

        In a democracy citizens are ultimately responsible for all actions by
        democratically elected officials – both good and bad. Citizens “voted” for having unsustainable benefits and debt levels that now have to be paid down. Yes, each individual can say they did not understand or did not know of such and such, but they enjoyed the benefits of living in the free society where they freely choose their officials. I believe the general populace has to pay all the ultimate debts incurred by the government in the democracy – always!

        The individual has always had to struggle to keep from being overwhelmed by the tribe. When you try it, you will be alone often and sometime frightened. But no price is too high to pay for the privilege of owning yourself!!! Friedrich Nietzsche

      2. Anonymous says:

        Gordon Brown claimed to have ended boom and bust. FAIL !

        The only proven way to end boom & bust is a centrally planned economy. The USSR never had a boom, but it sure did bust !

  3. Anonymous says:

    They really are not fooling anyone! What standard distribution of devious politically motivated statisticians. I can say that with 95% confidence!

    1. forbin says:

      they have fooled those who count and do not report those who do not

      the Great Unwashed can be fooled most of the time but the cattle are getting restless

      but the yudas goat will sing his song and they will be placated

      it is foolish to think that the greater majority want change – they do not – they want tomorrow to be exactly like today – stability

      how long can this go on ? ah events! my boy , events!

      the BBC/MiniTru and our media must be “captured” like Italy and Russia – how else can their loud silence be explained?

      Forbin

      popcorn and tin foil hat ( possibly needing an iron one soon!) ready

    2. Anonymous says:

      Hi Barncactus

      I spotted this earlier on the Guardian site and the individual is Andrew Dilnot the Chair of the UK Statistics Authority..

      Dilnott: “Every number we publish is wrong: but it is the best number there is”

      So he is half right….

  4. Anonymous says:

    Sean – like your line on this – perception vs reality. The fact is 99% of people in the UK have no idea about inflation index changes. The vast majority have no idea what the figure is for any index. Many could not even define inflation.

    But yet they all know goods are getting more expensive and they have less disposable income. Shut the curtains but reality continues, unabated.

    1. Anonymous says:

      Hi progrock
      I think the question what do we/you think inflation is? Should be the starting point for our inflation measurement. We should only move away from that for a very good reason.
      I do not think statisticians are born bad and I am sure the majority want to record things accurately but leaving matters entirely to them has dangers.
      1. They come under establishment pressure to produce reasons for lower inflation numbers.
      2. They get lost in a statistical underworld which departs ever further from reality in the same way that economics did and in the hands of more than a few still does.

  5. Alex says:

    I guess thats the problem.

    Hedonics – the product substitution.

    When the price of your Stake rises too much, you choose something similar but cheaper, perhaps beef instead. Perhaps not a good example because the food manufacturer is ahead of you and substituted Horse meat for your beef. But anyway….

    Using the same process, when your electricity price is rising you substitute it for, errr, um, another electricity.

    Electricity being electricity, if you can’t change that, then its time to change the measure.

    But scarily, 1987=100 and now its 247, does that translate to requiring £247 to buy what would have cost me £100 in 1987?
    On that basis, if I’d been clearing a nett income of £500 per week in 1987 I’d now need £1,235 per week to have stood still?

    Question that comes to my mind is now they’ve changed the index to reflect a lower rate, will they leave the stoking fire alone, or will they bring in another £50 billion QE on the basis of stimulus rises to fill the inflation gap?

    1. Anonymous says:

      Hi Alex

      In principle the answer to your question is yes although over the 25+ years even the RPI has had changes. Whilst the spectre of hedonics appears and yes it was a change (2004) what I really mean is over that period products change. I saw a BBC documentary series on the 70s 80s and 90s on BBC4 and it was fascinating to see when new products came in. So we have had PCs,MP3 players laptops tablets mobiles etc. etc. in the intervening periods.
      Another example of a change was house depreciation in 1995 as they tried to cover housing costs more accurately. So not all chages are bad.
      As to QE I have suspected that we will get more new QE ( as opposed to be recycling or Operation Twist currently happening where £1.1 billion was bought today) sooner or later.

  6. max says:

    it is ironic that, in trying to remove all things that go up from the measurement of inflation, that they actually are INCREASING the likelihood of high inflation. If they had put house prices in inflation during the period 1996 – 2008 then Merv the Swerv King, could not have claimed that he presided over an era of low inflation.

    In actual fact Mervyn King presided over one of the highest inflation eras ever, but what does he care with his index linked pension. (is it now linked to CPI?). Or is he indeed to stupid to realise that house price inflation is actually also inflation?

    1. Anonymous says:

      Thanks max good comment. I too would love to know which index is used to calculate Merv the Swerve’s pension. Thanks Shaun another fine blog, The ONS,IFS & for that matter the BBC for their inept reporting should hang their heads in shame.

      1. Anonymous says:

        Hi Max and Hopping Pot
        As of the last time I checked it had somehow slipped their mind to switch the Bank of England pension scheme from RPI to CPI. Forgetful eh?

  7. forbin says:

    Hello Shaun

    in other news the MoD flies in 1 million Euros to UK Cyprus troops

    I’m sorry , what? electronic transfer is no good – the dammed banks are shut?

    or is this a sign of something else ?

    Forbin

    1. Anonymous says:

      Hi Forbin
      I was so hoping the final part of that journey was going to be by helicopter!
      It seems as though electronic transfers have been blocked and even if say our government did that then they may not be able to get the monet as the bank holiday is stretching to one of the longest ever. Last I heard it was now extended to next Tuesday.

  8. forbin says:

    Hello Shaun,

    If the CPI is used for benifits and RPI for taxes

    and RPI is too high – so I get a refund ?

    and actually are they still using this “flawed” RPI to gather taxes? if so , why ?

    Forbin

  9. ernie says:

    Shaun as you no doubt know, the “Austrian” economists maintain that one cannot measure the general level of prices in any meaningful way and regard these kinds of indices as pointless. I must say they have a point. I wonder if it would be better (not for the politicians of course!) if any measure just included a shortish list of basic essentials in foodstuffs, plus the cost of energy which would cover transport costs, plus the real cost of shelter – you could include both house price indices and rent indices. That should cover what really counts, which is food,energy and shelter. No point adding up all kinds of things outside that (electronics etc) as you will have counted the things which every single person needs in order to survive.

    1. Anonymous says:

      Hi Forbin,

      I’ve previously suggested an actual inflation index tabulated on sales. Yes it’s a massive amount of data, but the computer hardware is ever better.

      For example they could record the annual UK spend on baked beans and average price per kg. total money spent on petrol and number of litres etc.

      But the politicians we have don’t want faultlessly accurate GDP & inflation data ….

    2. Anonymous says:

      Hi ernie
      Actually there are lots of issues with the Austrian way too as for example which money supply do you use? Also if we go deeper what is money? And so on….
      Actually our leaders/establishment have taken exactly the opposite route to your proposal as so-called “core” inflation measures exclude food and fuel. I can only think of 2 things more core than them which are water and oxygen!

  10. Rods says:

    Hi Shaun,

    Another good day’s reporting from you and I guess we had best make the most of it, now politicians will have to power to sensor, sorry regulate the news. It probably won’t be long before your blog is barred for reporting the wrong sort of financial news, with real facts, rather than smoke and mirror official press releases, which seem to be reported and never challenged by most of the MSM!

    It seems to me the biggest rate of inflation at the moment is the speeches, press releases and excuses from the BOE, Treasury and Government on how they have got it so right and how reality has got it so wrong! Like Nazi Germany, the USSR and now the UK and the EU. Propaganda is the new reality.

    To me the ONS have taken a very sly and cowardly way out of the RPI debate. They try to discredit it, rather than change it and then have to justify what they have done in court with a challenge by inflation-proof bond holders or to have further consultations on its change and again having to provide convincing evidence on why they think it is wrong, where the overwhelming consensus has been to keep the status quo, where it gives a higher inflation rate and probably a more accurate measure of real world inflation. IMHO for a supposid quasi-independent organisation this has an interfering political fudge, Sir Humphrey Appleby, smell about it!

    Talking of which, where all EU officials are saying this deposit raid is a one off in special circumstances, I think the lady doth protest too much! So, now it has been officially denied, who is next Spain? It would explain the draconian penalties being imposed at the moment on those who don’t make a full disclosure on their full financial affairs to the authorities. 10% compulsory donation on all your wealth, anyone to help pay for the €200bn+ undeclared losses in Spanish banks?

    Where in Cyprus all MPs and the President are having a vote on the EU bailout this afternoon and they have now all pledged to abstain. Have they been made an offer they can’t refuse by some of the holder’s of deposit accounts? Losing face or having to face an angry Russian Mafia, is probably not that difficult a decision.

    Still tomorrow should be entertaining, where it is bloodsucker day, I wonder how many more pints (sorry litres), the vampire squid in no. 11 can extract from us over the next year, without us all complaining too hard!

    Seems it is time to break out those classic inflation records again. For the ONS: “Down, Down” by Status Quo and for the rest of us: “The only way is up” by Yazz and for the Chancellor tomorrow: “Stealin’ when I should have been buyin'” by Uriah Heep.

    1. Anonymous says:

      Hi Rods
      I havent been regulated yet. If I am I suppose I can always play the song by Warren G which I have always kind of liked and remind myself that his regulate was somewhat more final!
      One solution to the problems in Cyprus would be to tax use of the word “unique” and the phrase “one-off” as you would soon have plenty of money.

  11. Noo 2 Economics says:

    Hi Shaun,

    “The RPI has been designated as a National Statistic
    No it hasn’t as they just scrapped that designation”

    I think they did say “de – designated” although I am not sure that is an actual word.

    Unfortunately for them they scored yet another own goal as RPI falls in the first month they de designate it so they can”t “officially” report it, whilst they have to report the increase in inflation in their “superior internationally acclaimed” CPI. As you would say – you really couldn’t make it up!

  12. James says:

    Shaun,
    Off topic and very late, but I think that everyone is missing the reason why NOT ONE Cypriot mp voted for the bank depositi raid. Would you vote to steal money from a Russian mafia account? I certainly wouldn’t and think that the extra pain inflicted on the big depositis to let the rest off made it MORE likely that this wouldn’t fly!!

  13. Anonymous says:

    I wish that there were Canadian business columnists who took
    the same strong interest in inflation measures that you do, Shaun. You couldn’t get a Canadian business journalist to write an article on experimental inflation measures that StatCan introduced even if you put a knife to their throat. (I’m just guessing.)

    From September 1997 forward, the ONS calculated an experimental series called the Final Expenditures Price Index. Although it was not specifically mentioned, it was obviously introduced as a potential alternative target inflation indicator for the Bank of England, responding to criticism that the RPIX or the CPI constituted too narrow a base. Its definition roughly corresponded to final domestic demand, but it didn’t survive. The index excluded imputed series that were part of FDD like imputed rents, on the grounds that the index should represent actual prices, but then
    output prices were imputed for current government expenditures where none
    existed. It didn’t make any sense, and the index was dropped. There is simply a limit to how far the scope of expenditures can be expanded for an inflation
    target indicator. Once you take in all personal expenditures that are not
    imputations and cover off the household portion of residential construction
    expenditures, you have gone about as far as you can go. This is the logic behind the net acquisitions approach to owner-occupied housing (OOH) proposed for the European Central Bank, the approach that, as you noted, was most unwisely rejected by the Consumer Prices Advisory Committee last year.

    I suspect the new CPIH will have a kinder fate than the FEPI. In a sense, it is a ludicrous hybrid: a proxy series grafted onto a consumer price series one of whose basic principles is to shun proxies. However, it does have limited analytical usefulness as a way of estimating the impact of differences in the treatment of OOH on the divergence between the CPI and the household final consumption expenditures (HFCE) deflator. I pioneered an analytical consumer price series for Canada in 1985 for much the same reason. (Unfortunately, the series, while frequently updated, now stops at August 2000. A 2007 paper by Justin Hume and others on “Accounting
    for the Difference between the CPI and Personal Expenditure Price Index in
    Canada” made no explicit estimate of the difference between the CPI and the
    deflator for personal expenditure on consumer goods and services due to differences in the treatment of OOH, which was sort of like a revival of Hamlet that left out the prince of Denmark.)

    The CPAC recommended that the rental equivalence approach be adopted to be consistent with the HFCE deflator, and then recommended that the OOH series include council taxes, not part of the HFCE, because no-one really cares how the HFCE deflator is calculated anyway. Go figure. Anyway, it seems that the ONS was wise enough to disregard the CPAC with respect to council tax, which doesn’t seem to be part of the new CPIH measure.

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