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Why Ben Bernanke's speech makes him S&P's new BFF

Hopes for a new round of stimulus out of the U.S. central bank should downgraded after Bernanke's Jackson Hole speech.

The U.S. Capitol Hill (Photo: Bill Clark/Getty)

The most powerful banker in the world gave a speech on Aug. 26 at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyoming.

As head of the U.S. Federal Reserve, Ben Bernanke was expected by many to outline exactly how he plans to save the world’s largest economy from slipping back into recession. That didn’t happen.

Now, expecting some form of new stimulus program to be announced was not crazy. After all, the U.S. economy is showing clear signs of distress and there does not yet appear to be much that Washington politicians can do to help matters, at least not in the short term. In fact, the boys and girls on Capital Hill recently made things worse by fighting over the obvious need to raise America’s debt ceiling in order to pay Uncle Sam’s bills, which helped Standard & Poor’s conclude that a credit rating downgrade for America was justified.

And let’s not forget that Bernanke has been bending over backwards in recent years to find ways to stimulate an economic recovery in America that supports jobs growth.

When it comes to central banking, Bernanke is clearly a creative thinker. Indeed, this is the guy some Fed watchers not-so-playfully like to call Helicopter Ben because of a 2002 speech in which Bernanke talked about fighting deflation by printing money by referring to a theoretical “helicopter drop” of cash on the economy.

Simply put, Bernanke knows how to play around with the U.S. money supply. But at Jackson Hole, he did not say anything about new monetary policy initiatives aimed at boosting U.S. economic activity. Instead, he showed the world just how good America’s top central banker can be at passing the buck.

In his speech, Bernanke noted the financial crisis and the subsequent slow recovery have caused some to question whether the United States, notwithstanding its long-term record of vigorous economic growth, might not now be facing a prolonged period of stagnation. But he also noted that most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.

“To achieve economic and financial stability,” he said, “U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage. The increasing fiscal burden that will be associated with the aging of the population and the ongoing rise in the costs of health care make prompt and decisive action in this area all the more critical.”

In other words, America’s reputation as a credit risk is on seriously thin ice and only the politicians can save the day. That’s far from a positive outlook, which is why people at S&P are probably smiling for the first time in weeks.

For Bernanke’s full speech see here.