LAMBRO: Paper tiger

Economy is likely to falter when Bernanke stops printing money

The Federal Reserve served notice this week that it will begin scaling back its costly economic stimulus program this year that has been propping up the chronically weak Obama economy.

Fed Chairman Ben S. Bernanke’s announcement was the economic equivalent of an ice-cold shower for the Obama administration — essentially saying that the time is coming when the Fed will pull the plug on the economy’s only life-support system.

The stock market plunged Wednesday, with the Dow Jones industrial average tumbling more than 200 points.

Interest rates rose, with 10-year Treasury bills jumping by nearly 8 percent, making government borrowing far more costly in the months and years to come. The fixed 30-year mortgage rate rose to nearly 4 percent, hitting prospective home buyers and slamming the brakes on home sales that could further slow already tepid growth.

It may be a coincidence, but Mr. Bernanke’s heads-up that the Fed will soon be tapering its $85 billion-a-month bond-buying stimulus came just a few days after Mr. Obama hinted the Fed chairman’s job was nearing its expiration date. The president told Charlie Rose of CBS News that Mr. Bernanke had been in his job “longer than he wanted or was supposed to.”

Mr. Bernanke didn’t quite say this, but the hidden message in his announcement may have been: OK, Mr. President, you’re on your own after this.

Of course, Mr. Bernanke sprinkled his remarks with plenty of caveats about the timing of the Fed’s plans to withdraw from its stimulus initiative. If the economy worsened, the Fed could slow or scale back its plans, or if it improved, they could be accelerated. “Our policy is in no way predetermined and will depend on the incoming data and the [economic] outlook,” he said.

Nevertheless, in a surprisingly optimistic appraisal of the sluggish economy Wednesday, Mr. Bernanke said that he expected the jobless rate, now at 7.6 percent, to fall in the months to come and for the nation’s economic growth rate to pick up over the next several quarters. He made clear the Fed would halt its bond-buying when the unemployment rate reaches 7 percent.

Still, it’s not clear just where Mr. Bernanke sees economic growth coming from, or why he sees the job market taking off after months of meager full-time job growth.

“The economy must add more than 365,000 jobs each month for three years to lower unemployment to 6 percent. That would require growth in the range of 4 [percent] to 5 percent and is not likely with current policies,” says University of Maryland business economist Peter Morici.

Monthly new job figures haven’t come close to this level, and there are no credible forecasts that suggest they will in the near future.

Economic growth, which has been mediocre throughout Mr. Obama’s presidency, has averaged only 2.1 percent since mid-2009 — well below the 4 to 5 percent range needed to bring unemployment down to Mr. Bernanke’s targets.

In the 1980s, Ronald Reagan faced a more severe recession, with unemployment rising to 10.8 percent, high oil prices and double-digit interest rates. After Reagan’s across-the-board tax cuts kicked in, economic growth averaged 5.0 percent and the jobless rate plunged to 7 percent.

The economy is being held back by very bad policies, including growing trade deficits that rose by 8.5 percent between March and April as demand for imported goods outpaced American exports. That’s the painful price we pay for Mr. Obama’s four-year resistance to negotiating any new trade agreements that would open emerging markets to made-in-the-USA products.

High oil and gas prices — the result of anti-growth energy policies — increased government regulations, and higher taxes on investment are preventing our economy from reaching its full potential. Manufacturing, consumer spending and business inventories have slowed.

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