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Bernanke's Fed Had to Compensate for Congress' 'Fiscal Drag'

Back in 2009, Congress did provide a jolt to the U.S. economy through the Obama stimulus known as the Recovery Act. But two years later, the Tea Party upwelling within the Republican Party put a quick stop to fiscal stimulus, inexcusably slowing a nascent recovery. The purpose of the stimulus was to create the necessary conditions to spur the private sector to spend its billions in cash-on-hand to create jobs.

Remember, U.S. companies are holding a lot of cash. Moody's estimates that at the end of June, nonfinancial U.S. companies held $1.48 trillion in cash, according to a review of the more than 1,000 companies it rates. That pile has ballooned 81% from $820 billion at the end of 2006.

With a push from government, the private sector might be spending some of that money on their businesses, employing people and by extension, generating growth.

Bernanke's focus on unemployment led many of his critics to argue that he wasn't sufficiently concerned about inflation. But he was, and the fact that inflation remains well below the Fed's 2% target demonstrates for the present anyway, that the doomsday forecasts of out-of-control prices fueled by easy money were at best premature, or simply wrong. 

U.S. growth might have slipped into deflation had the Fed not taken pursued the "quantitative easing" measures that translated into buying $85 billion in asset-back securities each month for the past nearly two years.

"On the whole, except for in 2009, we've had very tight fiscal policy," Bernanke said on Tuesday. "People don't appreciate how tight fiscal policy has been." 

The Fed chief pointed out that government employment has cut 600,000 jobs from the trough of the recession. By comparison, he said, following the last recession, government at all levels had added 400,000 jobs by this point in its recovery. Unemployment still remains at an unacceptable 7%, and according to the latest numbers from the Labor Department, jobless claims rose in the week ended Dec. 14, surprising economists who had forecast a lower number.

The economy still needs both activist monetary and fiscal policies. That means a continuation of the Fed's stimulus program, now at $75 billion a month in asset purchases and  government programs to put people and contractors back to work. Job growth remains wanting even as the Standard & Poor's 500 Index  has ballooned an eye-popping 27% in 2013.

Curiously, China could provide something of a panacea, says Baker. The decision by policymakers in the world's second-largest economy to focus on domestic consumption rather than exports might provide the U.S. economy with a decisive push to lift growth to more respectable levels.

"Maybe China reordering its economy provides the catalyst that we need," Baker said. "The irony is that we're looking to China to provide a boost to the U.S. economy -- but we'll take what we can get."

-- Written by Leon Lazaroff in New York.

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