- The Washington Times - Sunday, November 27, 2005

“No,” replied Ben Bernanke at his Senate hearing examining his nomination to be chairman of the Federal Reserve Board. “I don’t think that the Federal Reserve, whose mandate, after all, is domestic price stability and employment, has much role in terms of the current-account deficit.”

Mr. Bernanke was responding to a question about the role, if any, of monetary policy in the development of what are perceived by some to be harmful imbalances in the U.S. economy. Those very large and expanding imbalances, which have caused us great concern, include: (a) a record-shattering trade-related current-account deficit, which has increased from 0.8 percent of GDP in 1992 to 5.7 percent in 2004 to nearly 7 percent this year; (b) the record reversal during recent years in the nation’s fiscal balance, which has moved from an average federal-budget surplus of $163 billion (fiscal years 1999-2001) to an average budget deficit of $370 billion (2003-2005), representing an average fiscal reversal of $533 billion per year; (c) America’s evolution from being the world’s largest creditor nation ($361 billion in 1980, measured by its net international investment position) to being the world’s largest debtor (-$2,484 billion in 2004, reflecting a four-year increase of $1,123 billion); and (d) the collapse in the U.S. personal saving rate, which has literally turned negative in recent months.

For a couple of reasons, the response by Mr. Bernanke, whose confirmation we strongly endorse, seemed steeped in irony. First, the Fed would have the task of reacting to any potentially catastrophic hard landing that might be precipitated by these imbalances. Second, way back in March, it was none other than Mr. Bernanke himself, then a junior governor at the Fed, who delivered a provocative lecture titled “The Global Saving Glut and the U.S. Current Account Deficit.” The speech endeavored to solve (and did so to our satisfaction) Fed chairman Alan Greenspan’s “conundrum” over the persistence of rock-bottom real long-term interest rates in the face of relentlessly rising short-term rates and accelerating inflationary pressures.

The speech was also widely interpreted to absolve U.S. economic policymakers, particularly those in the Bush administration, of major responsibility for the soaring current-account deficit despite their pursuit of a deficit-exploding fiscal policy. Many economists have argued that the budget deficits, coupled with the collapse in personal saving, have significantly contributed to the soaring trade deficit and America’s worsening status as the world’s largest debtor. Mr. Bernanke disagrees.

In answer to the question (“Why is the United States, with the world’s largest economy, borrowing heavily on the international capital markets — rather than lending, as would seem more natural?”), Mr. Bernanke’s self-described “unconventional” response “take issue with the common view that the recent deterioration in the U.S. current account PRIMARILY [his emphasis] reflects economic policies and other economic developments within the United States itself.” At the end of the speech he acknowledged downplaying the role of the U.S. budget deficit today.

Instead, Mr. Bernanke argued that over the past decade a combination of diverse forces has created a global saving glut — which helps explain both the increase in the U.S. current-account deficit and the relatively low level of long-term real interest rates in the world today. Among those diverse forces contributing to the global saving glut, he included the increased savings in several rich industrial nations (Japan and Germany, but not the United States) in preparation for dramatic increases in the ratio of retirees to workers; a “remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that transformed those economies [South Korea, Thailand, Brazil, Eastern Europe and the former Soviet Union] from borrowers on international capital markets to large net lenders”; the oil-price-induced return of massive petrodollar surpluses in the Middle East and other OPEC nations; and China’s accumulation of foreign reserves in order to prevent exchange-rate appreciation.

We wish we could be as sanguine as Mr. Bernanke appears to be regarding the root causes of America’s soaring trade deficit and debt levels. By ascribing much of the problem to foreign factors, he seems to be suggesting that we have far less power to solve the problem ourselves. We remain unconvinced. Referring to the misallocation of imported financial capital by many developing nations during the mid-1990s, Mr. Bernanke observed, “These capital inflows were not always productively used. In some cases, for example, developing-country governments borrowed to a avoid necessary fiscal consolidation.” With public and private foreign concerns having effectively financed virtually 100 percent of America’s $1.1 trillion in cumulative budget deficits over the past three years, we can’t help but believe that his admonition should apply to us.

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