Bernanke: Beware the Coming Crash

Econintersect:  A crash is coming and this time helicopter Ben doesn’t say that money drops by the Fed can prevent it.  Fed chairman Ben Bernanke says the crash will come from falling off a ‘fiscal cliff’ that will suck hundreds of billions of dollars out of the economy.  How big is the economic impact Bernanke envisions?  He doesn’t specify, but with the assumption that the impact would be less than $1 trillion, Econintersect has calculated that the hit to GDP could range between -1.9% ($300 billion lost) to -5.6% ($900 billion lost).  The nominal GDP decline in the Great Recession was -3.9% ($561.4 billion lost).  Bernanke sees a crisis that could rival or exceed the Great Recession.

Here is a summary of the fiscal cliff from MSNBC:

Unless Congress acts to soften the blow, economists are warning that a looming year-end collision of massive, “automatic” cuts in federal spending and the expiration of sweeping Bush-era tax cuts could crush an already weak U.S. economic recovery.

The potential economic train wreck is the result of Congress not addressing tough decisions on fiscal issues, apparently each side hoping that they can gain additional power by postponing decisions until after the national elections.

In some ways, this could have been a response to Paul Krugman’s Op Ed in The New York Times on 24 April 2012 which was very critical of the lack of effort “to rescue workers,” as Krugman put it.

The MSNBC article by John Schoen has some estimates of the economic fall from the fiscal cliff that are greater than Econintersect suggested at the beginning of the article.  From MSNBC:

The Congressional Budget Office predicted earlier this year that the full impact of those tax hikes and spending cuts would remove about 3.5 percent of gross domestic product, more than wiping out the current recovery. That would send the unemployment rate, which stood at 8.2 percent in March, to 8.9 percent by year-end and 9.2 percent at the end of 2013.

Some economists argue the hit to GDP could be even greater.  Morgan Stanley economist David Greenlaw figures the hit from the fiscal cliff would amount to more like 5 percent of GDP in 2013.

Others, like Deutsche Bank economist Joseph LaVorgna, think those estimates are overblown, though his assessment assumes Congress gets its act together and steers away from the cliff at the last minute.

John Lounsbury

Sources:

• Congress steering US economy toward ‘fiscal cliff’ (John W. Schoen, MSNBC, 26 April 2012)

• Earth to Ben Bernanke (Paul Krugman, The New York Times, 24 April 2012)