TOPICS > Economy

As Bernanke Tapped for a Second Term, U.S. Deficits Appear Likely to Soar

August 25, 2009 at 12:00 AM EDT
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Judy Woodruff speaks with journalists about federal deficit projections and President Obama's nomination of Federal Reserve chief Ben Bernanke for a second term.
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GWEN IFILL: President Obama nominated the chairman of the Federal Reserve, Ben Bernanke, to a second term today. The Bernanke vote of confidence happened at the same time two government reports projected much higher budget deficits over the next 10 years.

Judy Woodruff has our lead story.

U.S PRESIDENT BARACK OBAMA: The man next to me, Ben Bernanke, has led the Fed through one of the worst financial crises that this nation and the world has ever faced.

JUDY WOODRUFF: The president picked the middle of his family vacation on Martha’s Vineyard to break the news.

U.S. PRESIDENT BARACK OBAMA: As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage and his creativity, that’s exactly what he has helped it to achieve.

BEN BERNANKE: I’d like to express my gratitude to President Obama for the confidence he’s shown in me with this nomination and for his unwavering support for a strong and independent Federal Reserve.

JUDY WOODRUFF: The White House timing of the announcement diluted the sting from some bad news released today. The president’s budget director projected record high deficits for the next decade of $9 trillion, $2 trillion higher than earlier estimates.

Meanwhile, the Congressional Budget Office projected $7.4 trillion deficits over 10 years. The lower figure factors in the 2011 expiration of the Bush-era tax cuts for wealthy Americans. Both forecasts said the unemployment rate would rise to 10 percent and remain there through next year.

Chairman Bernanke’s current term ends next January. He will need to be confirmed again by the Senate in order to serve a second four-year term. The president said he had earned it.

U.S. PRESIDENT BARACK OBAMA: Ben approached a financial system on the verge of collapse with calm and wisdom, with bold action and out-of-the-box thinking that has helped put the brakes on our economic freefall.

And almost none of the decisions that he or any of us made have been easy. The actions we’ve taken to stabilize our financial system, to repair our credit markets, restructure our auto industry, and pass a recovery package have all been steps of necessity, not choice.

JUDY WOODRUFF: But those choices have brought Bernanke criticism as well as praise. The Fed did little to rein in mortgage lending practices that contributed to the housing market’s collapse and the credit crisis.

Bernanke helped shepherd the rescue of one investment bank, the failing Bear Stearns, and last fall was involved in the decision to let another, Lehman Brothers, go into bankruptcy. He was also involved in Bank of America’s controversial acquisition of Merrill Lynch.

He later pushed for the congressionally approved large bank bailouts of last fall. The Fed pumped an additional $2 trillion into the banking system to stabilize it. And through it all, Bernanke has kept interest rates at record lows, near zero.

This morning, the chairman spoke of his decisions as he looked forward.

Cautiously optimistic about economy

David Wessel
Author
I think the president decided that continuity rather than change, despite his oft-cited commitment to change, was wiser.

BEN BERNANKE: We have been bold or deliberate as circumstances demanded, but our objective remains constant: to restore a more stable financial and economic environment in which opportunity can again flourish and in which Americans' hard work and creativity can receive their proper rewards.

JUDY WOODRUFF: Last week, Bernanke gave a cautiously optimistic appraisal of that objective, telling a meeting of global banking officials that the U.S. economy is poised for growth.

For a closer look at the Fed and budget news, we turn to Maya MacGuineas, president of the Committee for a Responsible Federal Budget and director of the Fiscal Policy Program at the New America Foundation, a nonpartisan think-tank in Washington; Krishna Guha, U.S. economics editor at the Financial Times; and David Wessel, the author of "In Fed We Trust: Ben Bernanke's War on the Great Panic." He's also the economics editor of the Wall Street Journal.

Thank you all three for being here.

David Wessel, to you first. Why did the president do this? What were the pros that outweighed the cons?

DAVID WESSEL: The president figured that replacing the driver of the car when the road is still so bumpy and curvy was risky. I think the president decided that continuity rather than change, despite his oft-cited commitment to change, was wiser.

And I think the president looked at the alternatives to Ben Bernanke and thought, "You know, this guy isn't such a bad guy after all."

JUDY WOODRUFF: Now, Krishna Guha, this is the man who was there when the recession was coming, among many others, didn't see it coming, and would argue that his policies that he pursued were part of what brought this recession on.

KRISHNA GUHA: Well, it's certainly true that Chairman Bernanke did not foresee the trouble that was brewing, along with most other people, and some of the ideas that he advanced in the pre-crisis period, you know, I think he'd think differently about today.

But let's not forget: He was only Fed chairman for a year-and-a-half or so before this crisis erupted in August of '07. And it's really impossible to pin the blame for it on him.

JUDY WOODRUFF: David, do you -- any sense that anybody else was seriously considered?

DAVID WESSEL: No. We know that Larry Summers, the president's close economic adviser, has always been regarded as a rival to Mr. Bernanke. There were other people who might have been on the list.

But our reporting is that once President Obama, working with Chief of Staff Rahm Emanuel and Treasury Secretary Tim Geithner, actually focused on the choice they had, they didn't spend much time before they came to the conclusion that, in this case, continuity was wise and they were going to offer Mr. Bernanke a second four-year term.

JUDY WOODRUFF: Your reporting was the same?

KRISHNA GUHA: Yes, indeed.

JUDY WOODRUFF: And, Krishna Guha, he still has to be confirmed by the Senate. What's your sense of how that's going to go? What should we expect?

Congressional unease with the Fed

Krishna Guha
Financial Times
There are a lot of people in Congress who, although they credit Bernanke for doing everything he could to stop this crisis, are very uneasy about this extraordinary use of Fed powers.

KRISHNA GUHA: Well, I would be astonished if he was not eventually confirmed, but I think it will be a fairly rocky ride. There are a lot of people in Congress who, although they credit Bernanke for doing everything he could to stop this crisis, are very uneasy about this extraordinary use of Fed powers, about the way he's been in a sense creating money to pump liquidity into the markets to buy assets.

A lot of people in Congress don't like that. They fear the concentration of powers in the Fed. And so there's going to be some tough questions asked.

JUDY WOODRUFF: David, what's your sense of how the Senate process will go?

DAVID WESSEL: I agree with Krishna. I think confirmation is almost a certainty. But Mr. Bernanke and the Fed have become a lightning rod for congressional and public hostility towards the bailouts of Wall Street.

He did a good job trying to present his side of the story on the NewsHour and on "60 Minutes," but there are a number of members of Congress who are looking forward to an opportunity to whack him again, and I'm sure they will.

It's important for Mr. Bernanke that he get through this process with his credibility intact and with some sense that Congress does respect the independence of the Fed when it comes to making monetary policy, moving interest rates.

My expectation is like that, but as Krishna suggests, it could be a little bit rocky if they start beating up on him.

JUDY WOODRUFF: Maya MacGuineas, one of the things that's going to make his life difficult in the months and the years to come, assuming he is confirmed, are these other news, numbers that came out today, big, big deficit numbers for the coming decade. Tell us what's behind those numbers. What's driving this?

MAYA MACGUINEAS: Well, those are big, big deficit numbers, and they've certainly probably coupled the announcement of Bernanke with the announcement of those deficit numbers.

JUDY WOODRUFF: It looks that way.

MAYA MACGUINEAS: Very purposely, didn't they? And that was probably a smart move.

But, listen, what they have to deal with right now is a very difficult tightrope walk between helping to let the economic recovery continue -- you don't want to start balancing the budget right away -- but acknowledging that these deficit numbers are tremendously scary and actually pose a real risk to the recovery.

So the new deficit numbers show that there's going to be $2 trillion more over the next 10 years added to the debt. That's a wakeup call that we're going to have to do something to start coming up with kind of a medium-term budget plan.

And these numbers aren't all from the economic downturn. A lot of these are policy-driven, the White House's new policies that would actually make the deficit worse over the medium term.

JUDY WOODRUFF: So not all because of efforts to fix the economy?

Tackling the big deficits

Maya MacGuineas
New America Foundation
We have these huge deficits 10 years out. And many of them are because we have policies that are going to make the situation worse, and we don't enough that are going to tackle the big deficits.

MAYA MACGUINEAS: No, someone like myself, I don't look at the big deficits this year and say, "Oh, we have a problem." I say, "That was very appropriate for the downturn."

But we have these huge deficits 10 years out. And many of them are because we have policies that are going to make the situation worse, and we don't enough that are going to tackle the big deficits. Health care is the only one that's being pursued now. We'll see what happens with that, and that's not enough, either.

JUDY WOODRUFF: How much? Is the administration in a position to change these deficits? Or are these numbers static? Are we stuck with these numbers?

MAYA MACGUINEAS: They're going to have to. I mean, the way -- we're going to get out of this one way or another. It's either going to be through leadership or through a crisis, and let's hope it's through the White House and Congress coming together and tackling these things.

They're going to have to look at slowing the growth of health care costs as a big component of health care reform, but they're also going to have to look at all sorts of other policies, from defense to Social Security to taxes. These are the kinds of things political consultants are not eager to do, but they are what these numbers make clear there's no choice but to tackle them.

JUDY WOODRUFF: Krishna Guha, connect these bad deficit numbers to what the administration needs to do about this recovery and the job that Ben Bernanke has facing him now.

KRISHNA GUHA: Well, as Maya says, the real threat here are the long-term deficits, the structural deficits that looked as if they'll still be around long after the immediate crisis has faded.

This is a problem on a number of levels. As far as the recovery is concerned, people worry that at some point the bond market is going to get sick of this supply of American government debt and investors, foreign and domestic, will ask for higher rates of return, making it, of course, more expensive for the federal government to borrow money. This could crowd out private-sector borrowing and weaken the recovery.

It must be said, though, that at this point the bond market is actually reasonably relaxed. The yields are low, and that's because there's really no competition for savings right now. Private sector is not borrowing. People are trying to pay down debt. But at some point in the future, this will be a problem.

JUDY WOODRUFF: And how much of a problem will it be for the Federal Reserve board chairman, David, assuming he is confirmed for the second term?

DAVID WESSEL: Well, I think it's part of the environment that Mr. Bernanke faces over the next four years, if he's confirmed.

We borrow, as Krishna says, an enormous amount of money, and a lot it comes from foreigners. Part of Ben Bernanke's job will be to assure them that he has a policy that will keep the American economy relatively inflation-free and protecting the value of the dollar, because if they think that we're going to have inflation, if he's going to bow to political pressure and wait too long to tighten credit, or if they think he wants to let the dollar fall rather than raise interest rates to tighten it, they may look elsewhere to put their savings, and that may force higher interest rates here, and that would make the cost of capital more expensive, it would make buying homes more expensive, and that's something he wants to avoid.

JUDY WOODRUFF: Maya MacGuineas, from the perspective of somebody who watches the budget very closely, how do -- the fact that the Federal Reserve has essentially gotten into fiscal policymaking, that it's been the Fed that's been putting out, what, trillions of dollars over the last few months to try to fix what's going on.

Combining monetary, fiscal policy

Krishna Guha
Financial Times
[Bernanke's] got to figure out both how to unwind these extraordinary measures he's put in place to support the financial system and the economy and when to pull the trigger.

MAYA MACGUINEAS: That's right. Monetary policy and fiscal policy are now more combined than they ever have been. And one of the things that sort of Fed-watchers have noticed is that Chairman Bernanke in his speeches has been voting some of his talking points, sort of the importance of responsible budgeting and sustainability in the budget, things we don't have right now.

Part of the reason is really political. Congress was not eager to have to get involved with all of these bailouts and TARP and all the different things that -- it was a big political push to get the stimulus done, and it was actually quite helpful, I believe, that the Fed came in and started doing some of these things and helping the liquidity and helping with stimulus.

The challenge is now twofold. We have to think about an exit strategy for the Fed and also an exit strategy in fiscal policy. We have to figure out how to time those, how to sequence them. There's a lot of moving parts here.

JUDY WOODRUFF: And you referred to that a few minutes ago, Krishna. How big a problem is that for Bernanke? What are the choices that he has before him in the months to come?

KRISHNA GUHA: Well, he's got to figure out both how to unwind these extraordinary measures he's put in place to support the financial system and the economy and when to pull the trigger.

And although a lot of the concern is about how he might do it, my feeling is that, in the end, the really tough call is when. Wait too long and you're going to get too much inflation. Unwind too soon and we could still have a double-dip recession.

JUDY WOODRUFF: How will he know, David, when it's the right moment?

DAVID WESSEL: Well, we have to pray that he has just a great gut. It's a very difficult call, and it requires acting before it's clear.

One of the toughest problems that Mr. Bernanke will face is that it will inevitably be his judgment that the time to raise interest rates and tighten is before most Americans believe the economy is healthy and the members of Congress and the president's political advisers think the tightening is prudent.

And the trick will be to have the political courage to do what he think's right, even though it will be on undoubtedly unpopular and controversial.

JUDY WOODRUFF: And it's an election year next year, Maya MacGuineas.

DAVID WESSEL: It is.

MAYA MACGUINEAS: Well, and that certainly is going to be in play. When you have high unemployment numbers, nobody is going to want to be doing sort of the responsible pulling out the liquidity from the economy or coming up with deficit reduction plans. Those are not politically popular things.

But, again, there's sort of a very tricky balancing act that, if you don't do this quickly enough, you're going to lead to inflation or a debt spiral. And if do you it too quickly, you can derail a recovery.

JUDY WOODRUFF: Finish this off, Krishna Guha. Tell us, how good is his gut?

KRISHNA GUHA: I think his judgment so far has proved to be very good, but let's remember: We're halfway into, in a sense, a game of two hearts here. In fighting the crisis, he's been extraordinarily active and, on balance, most people think quite successful, but he's got the second half ahead, getting us back to normal without getting inflation, without getting a renewed recession. So, in some senses, our assessment of Ben Bernanke is still provisional today.

JUDY WOODRUFF: All right. Good note to leave it on. David Wessel, thank you. Krishna Guha, Maya MacGuineas, thank you, all three. Appreciate it.

GWEN IFILL: Chairman Bernanke talked with Jim Lehrer at a NewsHour forum last month in Kansas City. You can watch that session on our Web site at newshour.pbs.org.