Both Bernanke and Draghi have expressed barely concealed impatience that the politicians they are supposed to be working hand in hand with have failed to resolve their differences. Deploying the usual opaque Fed-speak at Jackson Hole, Bernanke said that fiscal policy had become an “important headwind” holding back the economy. But he also worried that “persistently high levels of unemployment will wreak structural damage on our economy that could last for many years," and he alluded to similar problems that his old colleague Draghi is having across the pond.
What remains unknown is how much these two unelected world figures are coordinating with each other, but speculation is rife. Bernanke and Draghi are not only longtime acquaintances but also considered to be like-minded professionally. Both men got their Ph.D’s in economics at the Massachusetts Institute of Technology and studied under Stanley Fischer, one of the world’s most renowned economists (currently the head of the Bank of Israel). Like Fischer, both come strongly out of the New Keynesian tradition, acknowledging the need for government oversight and occasional intervention in tough times. According to a Fed official I spoke to in 2011, Bernanke and Draghi began consulting regularly after the latter was appointed in June of that year.
Given the limits in what they can do, both men have demonstrated an impressive ability to work themselves out of the policy boxes their respective politicians have left them in. Under Bernanke, the Fed opened new multitrillion-dollar lending windows, slashed its benchmark rate to virtually zero, and began a series of unconventional moves to push long-term interest rates lower. But the moves have not been enough by themselves to stimulate strong growth. Draghi has been just as constrained by politics. The European Central Bank's bias, strongly influenced by Bundesbank thinking, is toward ever-greater austerity and price stability. Draghi must also worry that if he continues to turn the ECB into a Bernanke-esque stimulus machine, investors in European debt could grow scared that the eurozone is no longer the bastion of sound money.
So more growth will be a close-run thing for the U.S. and European economies in the coming months, and a few ticks upward or downward could easily determine the outcome of the presidential election. Says Farley: “I think Ben is going to muddle through, and I don’t think the economy is going to go back into recession. But I think Europe is already in negative territory and they don’t know it."
President Obama, in his speech on Thursday night, seemed to warn his audience of the bad economic news to come. “I never said the journey would be easy,” he said. Tell that to the dynamic duo of Bernanke and Draghi.
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