Kudlow’s Money Politics

‘Medium Term’ Ben Sucks Up to Spendthrift Congress

When Ben Bernanke testified a couple of days ago before the House Budget Committee, he gave a fairly upbeat forecast of 3.5 percent growth this year, and somewhat stronger growth in 2011. Okay, fine.

However, when Bernanke was asked about out-of-control spending and deficits, he basically said, yes, this is a huge problem, but it’s not an immediate problem. He said, sure, the fiscal situation is not sustainable, but it shouldn’t be solved or attacked until “the medium term.” By that he means immediate spending cuts might harm economic recovery. I think this is nuts.

If the Fed head says, on the one hand, it’s a self-sustaining recovery led by the private sector, which is what he said, then why not tackle the overspending problem right away? Waiting for something called the medium term just lets Congress off the hook — which, of course, is what the Democrats want to hear. The Democrats are cooking up another $150 billion to $200 billion so-called stimulus package. And that package includes a near $50 billion tax hike, which will sharply increase the capital-gains tax on investment funds. In other words, a sure jobs loser.

But Bernanke keeps talking about the medium term. Is there ever a good time for Congress to cut spending? Apparently not.

You know, Paul Volcker used to chastise Congress for spending and deficits. He would have shouted out this past week that there simply is no need for more spending. Volcker would have put Congress on the spot. He would have been tough. And in his heyday, Alan Greenspan would have done the same. But not Ben Bernanke.

Why? Well it’s not hard to speculate that Bernanke is a politically weak chairman. His reconfirmation generated a record 30 “no” votes. And he has been desperately fighting the Democratic Congress to stop a GAO audit of Fed policy and to preserve the Fed’s bank-supervision turf over smaller community banks. No wonder he doesn’t want to rock the fiscal boat.

And get this: When asked about the huge 30 percent gold rally, the Fed head said he was “puzzled.” He said, “I don’t fully understand movements in the gold price.” Well, maybe the distinguished former Princeton economist should connect the dots between massive overspending and borrowing on the one side and the soaring gold price on the other.

One of the gold messages is that fiscal bankruptcy is going to lead to a continuation of an ultra-easy zero interest rate and excess money creation. Gold is looking at wildly profligate spending and borrowing in Europe and the U.S. as a leading indicator of massive money creation that ultimately will lead to significantly higher inflation. In other words, a loss of confidence in paper money, due in no small part to a loss of confidence in governmental fiscal policies.

If central bankers like Bernanke won’t get tough on the budget, gold prices are going to continue to rally higher and higher. Yet instead of slamming Congress, Bernanke sucked up to it. This is exactly wrong. He had a chance to slam his foot down on the unnecessary spending bill (and tax hike), but he failed to do it.

Larry Kudlow — Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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