The Debt Ceiling Is Breaking Ben Bernanke’s Heart

The cardiac Congress is undermining the Fed chairman’s economic crusade.

WASHINGTON, DC - SEPTEMBER 18: Federal Reserve Chairman Ben Bernanke pauses as he speaks during a news conference at the Federal Reserve, September 18, 2013 in Washington, DC. Chairman Bernanke spoke after a closed door meeting of the Federal Open Market Committee. The Federal Reserve announced today that it will not scale back the bond-buying program and continue buying bonds at $85 billion a month. 
National Journal
Patrick Reis and Catherine Hollander
See more stories about...
Patrick Reis Catherine Hollander
Oct. 9, 2013, 2 a.m.

Ben Bernanke has spent half of a dec­ade try­ing to coax in­vestors out of their postre­ces­sion bunkers. Now, Con­gress is set to send them run­ning for cov­er again.

The gov­ern­ment may not de­fault on its loans in the com­ing weeks, but just by com­ing close to the edge, law­makers will pull mar­kets in the ex­act op­pos­ite dir­ec­tion from where the Fed­er­al Re­serve has been try­ing to push them.

Bernanke’s bid to re­sus­cit­ate the eco­nomy de­pends on per­suad­ing people to make two leaps of faith. First, busi­nesses re­quire enough con­fid­ence in the fu­ture to ask for the big loans they need to ex­pand their op­er­a­tions, in part by hir­ing some of the coun­try’s 11.3 mil­lion un­em­ployed work­ers. Second, lenders need to be­lieve that mak­ing those loans is the best use of their money.

The Fed’s quest to drive down in­terest rates tar­gets both goals. By keep­ing rates low, Bernanke makes it cheap­er for bor­row­ers to take out loans. And to per­suade lenders to take a risk on those loans, the Fed has bought up massive quant­it­ies of Treas­ury bonds — con­sidered the ul­ti­mate safe in­vest­ment — in an ef­fort to drive down the rate at which those bonds pay off to private in­vestors. The hope is that in­vestors, dis­sat­is­fied with the low rate of re­turn they get from the fed­er­al gov­ern­ment, will in­stead put their money in­to the private sec­tor.

That’s where Con­gress’s be­ha­vi­or is so dam­aging. By pre­cip­it­at­ing one crisis after an­oth­er, law­makers are send­ing in­vestors run­ning back to in­vest­ments like Treas­ury bonds — which keep their money safe but do pre­cious little in the way of stim­u­lus. If Con­gress wanted to spook lenders, it could hardly pick a bet­ter meth­od than flirt­ing with de­fault. “It would be the op­pos­ite of what the Fed’s wanted to do,” says Stu­art Hoff­man, chief eco­nom­ist at PNC Fin­an­cial Ser­vices. “It ba­sic­ally says something has happened out­side the Fed’s con­trol that could shock the eco­nomy in­to re­ces­sion.”

For Bernanke, the cur­rent debt-ceil­ing stan­doff may be all the more in­furi­at­ing be­cause he’s seen it, and its de­struct­ive ef­fects, play out be­fore. When the coun­try last brushed up against the debt ceil­ing in the sum­mer of 2011, in­vestors flocked to Treas­ury bonds, look­ing for a safe place to park their as­sets while they waited to see wheth­er Con­gress was go­ing to un­leash eco­nom­ic chaos.

As in­vestors sought refuge in bonds, they fled from stocks. The stock mar­ket — fa­cing a de­fault threat in the U.S. and a sov­er­eign-debt crisis in Europe — plunged as the Aug. 2 debt-ceil­ing dead­line ap­proached and con­gres­sion­al Re­pub­lic­ans, Demo­crats, and Pres­id­ent Obama re­mained dead­locked. The Dow Jones in­dus­tri­al av­er­age began slid­ing on Ju­ly 22, and the losses wer­en’t erased un­til Janu­ary of this year. A gov­ern­ment de­fault was aver­ted in the nick of time, but Stand­ard & Poor’s cut the coun­try’s AAA cred­it rat­ing.

His­tory ap­pears poised to re­peat it­self as bond in­terest rates are fall­ing sharply in the run-up to the new dead­line, Oct. 17. The yield on the 10-year Treas­ury bond, the mar­ket’s bench­mark, hit a two-month low on Oct. 3, sig­nal­ing that in­vestors are will­ing to swal­low lower pay­outs on their in­vest­ment in ex­change for safe har­bor. Yields on the one-month T-bill soared Tues­day; the high­er short-term fed­er­al bor­row­ing costs re­flec­ted in­vestors’ con­cerns about a de­fault in the com­ing weeks. Stocks have slipped in re­cent weeks, too, as a gov­ern­ment shut­down stretches on and the bor­row­ing-lim­it dead­line nears.

On the face of it, it’s con­fus­ing that in­vestors would seek refuge with the U.S. gov­ern­ment at the same time the gov­ern­ment is in danger of de­fault­ing on its debts. But in­vestors fig­ure Wash­ing­ton will even­tu­ally meet those ob­lig­a­tions, and that in the tur­moil ac­com­pa­ny­ing a brush with de­fault — or if the coun­try’s cred­it rat­ing is lowered — oth­er in­vest­ments would fare worse.

“Treas­ur­ies are worth a little less [after a down­grade],” Hoff­man says. “And guess what? Every­body else is also worth a little less.”

The Fed may already be re­spond­ing to the un­cer­tainty of today’s gov­ern­ment shut­down and po­ten­tial de­fault. Bernanke was ex­pec­ted to an­nounce the be­gin­ning of a di­al­ing-back in Fed stim­u­lus in Septem­ber, but his policy-mak­ing com­mit­tee shocked in­vestors by an­noun­cing the Fed would keep go­ing full speed ahead and ob­liquely ref­er­en­cing Wash­ing­ton’s fisc­al tur­moil as one of the causes for the de­cision.

It’s un­clear how much lever­age they have left. The Fed has already bought more than a tril­lion dol­lars worth of bonds and has kept the fed­er­al funds rate, the cent­ral bank’s bench­mark in­terest rate, close to zero for more than four years — and none of that has man­aged to move the un­em­ploy­ment rate down to 6.5 per­cent, the point at which the Fed said it would be­gin to slow down its stim­u­lus ef­forts. Bernanke has said the stim­u­lus pro­grams could of­fer “di­min­ish­ing re­turns” over time.

There are also risks in the Fed’s re­spond­ing to fisc­al chaos by buy­ing more bonds and keep­ing in­terest rates low. Fed­er­al Re­serve Board Gov­ernor Gov­ernor Jeremy Stein has warned that a pro­longed low-rate en­vir­on­ment could cause in­vestors to “reach for yield,” Fed­speak for in­vestors who seek profit so des­per­ately that they pile in­to the ris­ki­est in­vest­ments and im­per­il the en­tire fin­an­cial sys­tem. And Kan­sas City Fed Pres­id­ent Es­th­er George has voted against the Fed’s stim­u­lus ef­forts this year, cit­ing con­cerns about cre­at­ing “fin­an­cial im­bal­ances.”

But for now, with un­em­ploy­ment still high, and with a gen­er­a­tion of work­ers watch­ing as the pro­longed eco­nom­ic slump dam­ages their long-term eco­nom­ic pro­spects, Bernanke’s big­ger worry is that all his ef­forts have failed to pro­duce the good-times-are-here-again growth that Amer­ic­ans are wait­ing for.

Throughout his ten­ure, Bernanke has spoken op­tim­ist­ic­ally about the Fed’s power to heal a dam­aged eco­nomy, but bar­ring a dra­mat­ic course cor­rec­tion, the chair­man will spend his fi­nal few months watch­ing Con­gress break it all over again. Maybe Janet Yel­len, whom the White House nom­in­ated Wed­nes­day to suc­ceed him, will have bet­ter luck with Cap­it­ol Hill.

What We're Following See More »
MARCIA FUDGE TO PRESIDE
Wasserman Schultz Stripped of Convention Duties
6 hours ago
THE DETAILS

Democratic National Committee Chairwoman Debbie Wasserman Schultz "will not have a major speaking role or preside over daily convention proceedings this week," and is under increasing pressure to resign. The DNC Rules Committee on Saturday named Ohio Democratic Rep. Marcia Fudge as "permanent chair of the convention." At issue: internal DNC emails leaked by Wikileaks that show how "the DNC favored Clinton during the primary and tried to take down Bernie Sanders by questioning his religion."

Source:
EARLY BUMP FOR TRUMP?
New Round of Polls Show a Tight Race
2 days ago
THE LATEST
  • A Rasmussen Reports poll shows Donald Trump ahead of Hillary Clinton, 43%-42%, the fourth week in a row he's led the poll (one of the few poll in which he's led consistently of late).
  • A Reuters/Ipsos survey shows Clinton leading 40%-36%. In a four-way race, she maintains her four-point lead, 39%-35%, with Gary Johnson and Jill Stein pulling 7% and 3%, respectively.
  • And the LA Times/USC daily tracking poll shows a dead heat, with Trump ahead by about half a percentage point.
BELLWETHER?
Candidates Deadlocked in Ohio
3 days ago
THE LATEST
17-POINT EDGE AMONG MILLENNIALS
Clinton Dominates Among Younger Voters
3 days ago
THE DETAILS

In an election between two candidates around 70 years of age, millennials strongly prefer one over the other. Hillary Clinton has a 47%-30% edge among votes 18 to 29. She also leads 46%-36% among voters aged 30 to 44.

Source:
NEW POLL SHOWS TROUBLE FOR TRUMP
Clinton Leads Trump Among Latinos by Nearly 70 Points
3 days ago
THE DETAILS

According to an online tracking poll released by New Latino Voice, Hillary Clinton leads Donald Trump among Latino voters, attracting support from 81 percent of Latino voters, to just 12 percent support for Trump. The results of this poll are consistent with those from a series of other surveys conducted by various organizations. With Pew Research predicting the 2016 electorate will be 12 percent Hispanic, which would be the highest ever, Trump could be in serious trouble if he can't close the gap.

Source:
×