Perhaps the most important part of Fed Chairman Ben Bernanke's mid-year report to Congress this week could be summarized in a simple paraphrase: The Federal Reserve can do only so much to help the economy.
Bernanke's view is that the Fed's first two efforts at quantitative easing, another way to say increasing the money supply, accomplished the goals of ending the recession in 2009 and stemming the tide toward deflation in 2010. He hinted that a third round may not be out of the question, but his statements were vague enough to keep everyone guessing.
It is, of course, impossible to know whether Bernanke's assessments of previous actions are true. There is no way to go back in time and see how the economy would have done without Fed action. What is indisputable, however, is that the economy has not regained its pre-recession strength. Unemployment remains stuck at about 8.2 percent, officially. Job growth slowed to a trickle during the April-June quarter. State and local governments remain saddled with out-of-balance pension obligations and the inability to raise revenue. Private businesses remain tentative about expanding or risking new growth.
And housing markets still carry the load of toxic assets in the form of houses and other properties encumbered by debt that exceeds their value. New reports this week said housing starts rose 6.9 percent last month, which was the highest rate since October 2008. That seemed to signal good news. However, it was tempered some by figures showing new permits for building homes dropped 3.7 percent. Mortgage interest rates, which have fallen to an all-time low, may be responsible for part of the surge in new starts, fueling a limited demand. But analysts say that, in any case, housing no longer carries a big enough load in the economy to counteract the downward trends in job growth and other factors, including economic troubles in Europe.
Meanwhile, the Fed also reported last week that revolving credit card debt rose by a steep 11.2 percent in May, which was higher than analysts had expected. The total aggregate revolving debt is at $870.2 billion. Some see this is as a good sign for the economy, figuring it means people feel confident enough to borrow again. But revolving consumer debt is a sign of the type of irresponsible spending that made it so difficult for many people to weather the economic storms that began in 2008.
Bernanke also cautioned Congress to come up with a long-term fiscal plan that would avoid automatic spending cuts in December, which he and others have said might trigger another recession. Again, it's hard to know whether those predictions are true. There is wisdom in his desire for bipartisan solutions to the nation's spiraling federal budget deficit. Automatic cuts, however, would seem better than no cuts at all, even if they are not nearly as desirable as well-considered cuts based on deliberation, compromise and demonstrated need.
Given the current political climate, such a desirable outcome seems the stuff of fiction. Bernanke was right. There is only so much the Fed can do, just as there is only so little Congress is willing to do. For the rest of us, prudence and the avoidance of unnecessary debt seem the most intelligent choices.