Ezra Klein's Blog, page 1000

Wonkbook: Bernanke moves; WH opposes foreclosure moratorium; foreign money does enter campaigns

It's not paranoid if they're really out to get you, and it's not pessimism if you're, well, right. For months, a fairly small group of bears have been calling for Ben Bernanke and the Federal Reserve to accept the need for unconventional policy measures that could boost the economy. It began as a quixotic argument, became a minority position, and now, it's Bernanke's expressed plan.

So you'd think the folks calling for Fed action would be exultant. But they're not. The concern is that the Federal Reserve's bond purchases will be half-hearted. The Fed is uncomfortable using these tools, and has signaled an intent to be cautious. But if they're too cautious, the purchase won't be big enough to work. And if they don't work, the Fed will lose credibility with the market because its intervention will fail -- which will be much worse. The result? The pessimists are still, well, pessimistic, despite the fact that their policy recommendations are being at least partly followed. And they've been right to be pessimistic before.

It's Monday. Welcome to Wonkbook.

Top Stories

Ben Bernanke signaled the Fed will buy bonds to help the economy, reports Neil Irwin: "If the Fed essentially prints money to buy bonds, as it is considering, it would help the economy by lowering long-term interest rates for home mortgages, corporate loans and other forms of lending. Forecasting firm Macroeconomic Advisers estimates that $400 billion in bond purchases would drive interest rates on 10-year loans down by 0.13 percentage points...He told an audience of economists and central bankers at a conference at the Federal Reserve Bank of Boston that the Fed 'is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate.'"

Paul Krugman fears this will be another half-measure: http://nyti.ms/a7wS8w

Could Bernanke have explained his plan in a way more likely to help it succeed? http://bit.ly/a0hh5z

A foreclosure moratorium won't help families, writes HUD Secretary Shaun Donovan: "For instance, in Cleveland, where there are over 18,000 vacant homes, lives Millie Davis who recently earned her Master's Degree in Urban Planning from Cleveland State University and just bought her first home - one that had fallen into foreclosure and sat abandoned for years. Had a blanket moratorium been in place, that sale would have fallen through -- not only deferring her dream of homeownership but leaving neighbors on the block to stand by and watch as their property values continue to plummet. Right now, families who have watched their home values decline over the last few years want nothing more than homebuyers like Millie to buy the vacant homes in their neighborhoods."

Members of Congress who voted against the stimulus lobbied for funds from it: http://wapo.st/94m4Vp

Millions in foreign contributions are funding midterm campaigns, reports Dan Eggen: "Political action committees connected to foreign-based corporations have donated nearly $60 million to candidates and parties over the past decade, including $12 million since the start of 2009, federal contribution records show. Top donors in this election cycle include PACs tied to British drugmakers GlaxoSmithKline and AstraZeneca, which together account for about $1 million; Belgium's Anheuser-Busch InBev, at nearly $650,000; and Credit Suisse Securities, at over $350,000. The donations must come from U.S. citizens or residents, and they make up a small fraction of overall political giving."

The five people Obama should hire now: http://wapo.st/9TkISV

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African drum sample interlude: The Avalanches remix "I'm a Cuckoo" by Belle and Sebastian.

Still to come: The foreclosure mess' damaging is rippling out further and further; behavioral economics is revolutionizing environmental policy; even Democrats want to change health care reform; and a corgi does a belly flop.

Economy

Everyone loses as the foreclosure mess continues, reports Brady Dennis: "As this deal and others like it languish, the effects are rippling across this community on Florida's west coast. Mamuyac has to continue paying rent for an apartment six miles down the road. Mamuyac's real estate agent hasn't been able to pocket his commission, nor has the seller's agent. Another home inspector loses out on work. This transaction is one of thousands in this area abruptly put on hold as lenders and state officials have sought to freeze foreclosures, a reaction to mounting reports of flawed and fraudulent paperwork and improper practices used to seize homes in foreclosure."

An undue emphasis on speed from foreclosure processors allowed the current mess to happen, report Ariana Eunjung Cha and Zachary Goldfarb: "Law firms competed with one another to file the largest number of foreclosures on behalf of lenders - and were rewarded for their work with bonuses. These and other companies that handled the preparation of documents were paid for volume, so they processed as many as they could en masse, leaving little time to read the paperwork and catch errors. And the big mortgage companies overseeing it all - including government-owned Fannie Mae - were so eager to get bad loans off their books that they imposed a penalty on contractors if they moved too slowly."

The deficit shrank this year: http://politi.co/9iJJwF

A weak dollar is boosting American manufacturing, reports James Hagerty: "Many U.S. companies--from coal miners to a producer of tugboat clutches--are seeing stronger demand in Europe and Asia as the weak dollar makes U.S. goods cheaper there. Economists say the dollar's swoon, which started in mid-September following a summer rally, will provide a modest boost for U.S. exports, but they caution that it means American consumers and businesses will pay more for imported goods and raw materials... In the absence of free-trade agreements, 'A weaker dollar is one of the few ways you can get exports going,' says Mr. Kantor, who thinks many U.S. energy, industrial and agricultural companies will benefit.

Republican Indiana Governor Mitch Daniels is under attack for embracing a VAT: http://politi.co/9nG0XJ

Only tariffs will stop China, writes Sherrod Brown: "Economists, including free-traders, estimate that price manipulation keeps Chinese products 40 percent cheaper than comparable American-made goods. Inexpensive products might sound nice, but we lose 13,000 net jobs for every $1 billion increase in our trade deficit. Our $226 billion deficit with China has meant shuttered factories, lost jobs and devastated communities across America. And it's no longer just Chinese bicycles and electronics that are flooding our markets. China will soon make half the world's wind turbines and solar panels, most of which it plans to export to America. And, as usual, China's clean-energy industry relies on large government subsidies, in direct violation of international trade laws."

The Fed's tools for spurring a recovery are limited, writes Robert Samuelson: http://wapo.st/aCNQtG

China's protectionism extends beyond currency manipulation, writes Paul Krugman: "Last month a Chinese trawler operating in Japanese-controlled waters collided with two vessels of Japan's Coast Guard. Japan detained the trawler's captain; China responded by cutting off Japan's access to crucial raw materials. And there was nowhere else to turn: China accounts for 97 percent of the world's supply of rare earths, minerals that play an essential role in many high-technology products, including military equipment. Sure enough, Japan soon let the captain go...Even before the trawler incident, China showed itself willing to exploit that monopoly to the fullest. The United Steelworkers recently filed a complaint against Chinese trade practices, stepping in where U.S. businesses fear to tread because they fear Chinese retaliation."

David Leonhardt hosts a debate on the Renmibi: http://nyti.ms/9ITKxi

Reaction video interlude: Kids watch, react to "Double Rainbow", "viral videos.

Energy

Guilt is a powerful policy tool for helping the environment, reports Stephanie Simon: "The second paper described a study involving public-service messages hung on the doorknobs of several hundred middle-class homes in San Marcos, Calif...Some residents learned they could save $54 a month on their utility bill. Others, that they could prevent the release of 262 pounds of greenhouse gases per month. A third group was told it was the socially responsible thing to do. And a fourth group was informed that 77% of their neighbors already used fans instead of air conditioning, a decision described as 'your community's popular choice!' Meter readings found that those presented with the 'everyone's doing it' argument reduced their energy consumption by 10% compared with a control group.

Auto execs are still skeptical of electric cars, reports Mike Ramsey: "Takeshi Uchiyamada, Toyota's chief engineer, agrees that the biggest concern about electrics remains their driving range. Mr. Uchiyamada, who is considered the father of the Toyota Prius hybrid, said EVs likely will be confined to short-distance commutes while hybrid models will grow in usage... Ford thinks the future lies in cars with more efficient gas engines as well as plug-in hybrids that use small, rechargeable batteries augmented by gas engines. In 2020, Ford expects just 1% to 2% of its sales will be pure electrics, while 10% to 25% will be hybrids and plug-in hybrids, said Nancy Gioia, who leads the company's electric, hybrid-electric and plug-in hybrid programs."

The US is investigating China's clean energy subsidies, report Sewell Chan and Keith Bradsher: "the United States trade representative, Ron Kirk, said his office would investigate a complaint filed by the United Steelworkers, one of the nation's largest unions, on Sept. 9. The complaint asserted that China had violated its obligations under the World Trade Organization. 'This is a vitally important sector for the United States,' Mr. Kirk said. 'Green technology will be an engine for the jobs of the future, and this administration is committed to ensuring a level playing field for American workers, businesses and green technology entrepreneurs.'"

Geoengineering is worth a shot, writes Dana Milbank: http://wapo.st/dem3vy

Fears about nuclear energy show how humans weigh risks irrationally, writes David Ropeik: "Radiation from nuclear power is human-made, and human-made risks evoke more fear than natural threats. Nuclear power plants can have accidents (many still believe that they can explode like bombs), and people are intrinsically more afraid of risks associated with a single large-scale "catastrophic" event than they are of risks that cause greater harm spread over space and time. Many people don't trust the nuclear industry, or government nuclear regulators, and the less we trust, the more we fear."

Adorable animals getting wet interlude: A corgi does a belly flop.

Domestic Policy

Democrats are campaigning on reforming the health care bill, reports Sarah Kliff: "'I want to reform it and fix it and make sure that it works for small businesses and their families,' Alexi Giannoulias, the Democrat seeking President Barack Obama's old Senate seat, said on 'Meet the Press' on Sunday. 'If you can fix it -- Democrats and Republicans agree on six or seven items -- that's a pretty darn good start,' West Virginia Gov. and Democratic Senate candidate Joe Manchin told Fox News on Monday. 'I'd like to fix health care,' Democratic Kentucky Senate candidate Jack Conway said in a debate last week with Republican contender Rand Paul. 'He wants to repeal it. And I think that's a stark difference.'"

Cultural explanations of poverty are gaining ground in the academy: http://nyti.ms/dDkafH

US sugar production could collapse next year, reports Bill Tomson: "U.S. sugar production will be cut by about 20% if farmers are banned from planting genetically modified beets next year, according to data prepared for the U.S. Department of Agriculture as part of a court case over whether to continue allowing the practice. Genetically modified beets have come to account for 95% of the U.S. sugar-beet crop in the five years since they were approved by the Agriculture Department. But in August, a judge threw out the USDA's initial approval for the use of genetically modified seeds, saying it hadn't done enough research into the environmental impact. The department says the studies the judge required will take about two years."

The White House was working on health care within days of taking office: http://bit.ly/dbGYeU

Campaign finance regulations force spending out of the light, writes Gillian Tett: "In theory, America is a country that prides itself on the idea that Congress serves 'the people', not just the rich. Thus there is moral outrage over the concept of 'buying the vote', and laws exist to prevent that: individual donations are capped; most donations need to be disclosed; and (until recently) companies could not give directly to politicians. However, precisely because these detailed laws exist - and because campaigning is a very costly business, subject to a permanent type of inflation-cum-arms race - in recent decades America has developed myriad practices to enable that cash to flow indirectly. The result is a dense shadowy network of middlemen, rent-seekers and ambiguous institutions that are complex and inefficient; if not, downright odd."

The federal government is expading a program that checks jails for illegal immigrants: http://bit.ly/cI9lD6

Gridlock is not an effective check on partisanship, write Jacob Hacker and Paul Pierson: "Gridlock will not bring the stability and compromise that pundits crave. It will result in a slow, quiet, yet inexorable erosion of government's capacity to effectively address the nation's problems. Nor will it foster centrist solutions. Instead, it will strengthen the hands of those who resist the very idea that government can or should address these big issues -- and who understand full well that blocking change in policy yields social and economic outcomes they favor. This was a major part of the political story of the 1980s and 1990s, when the capacity of government to act in support of America's middle class eroded steeply, and economic inequality festered."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews, Mike Shepard, and Michelle Williams. Photo credit: Stephan Savoia Photo.

Reconciliation

Recap: Four ways to help homeowners; Treasury's response; and Ben Bernanke answered half the question.

Elsewhere:

1) How Wall Street made Christine O'Donnell.

2) James Fallows on the RMB.

3) Dems try to connect the Chamber of Commerce to the economy.

4) The biggest tax policy mistake of the year.

Recipe of the day: Chard with orange and shallots.

Mitch Daniels and the complicated relationship between conservatives and intellectuals

Last night, Indiana Gov. Mitch Daniels received the Hudson Institute's Herman Kahn Award. It was a friendly audience for Daniels, who ran Hudson before running for office, and for his 2012 ambitions. (One of the other people sitting at my table asked if I knew "the single reason" the economy wasn't growing very quickly. I suggested an absence of demand. He shook his head sadly. "The European socialist in the White House," he said.) But that doesn't mean it was an easy event for the Hoosier. In fact, I've rarely seen anyone deliver a more difficult speech.

Daniels's task was to reconcile the brand of rigorous intellectual analysis that Kahn prized and Hudson offers with the contempt for cloistered, self-styled experts that's emerged as central to the conservative critique of the Obama White House. And though it was interesting to watch Daniels attempt the trick, he didn't really land it.

We began with stories of the common man. The Indiana resident who would bring his bear Otis to the local bar. The elderly Jew who took to the woods as part of the resistance during the Holocaust and tells of the intellectuals who suddenly found themselves useless. Daniels held that Kahn was the sort of intellectual who placed himself among the people, not above them. He applied his intellect to "practical problems," like thermonuclear war. He loved interrogating taxi drivers, looking for the nugget of insight they had that he didn't.

That doesn't make him much use in the woods, of course. Kahn was more than six feet tall and weighed more than 300 pounds. That doesn't suggest an affinity for the survivalist lifestyle. I can't say what he would've thought of Otis, who once knocked his owner cold when he swiped him with his paw during one particularly long night at the bar. And if talking to taxi drivers makes you a populist, then Tom Friedman is going to lead the revolution.

When Daniels turned to reading excerpts of Kahn's writing, it quickly became clear that he prized Kahn's policy analysis, not his common touch. The first advocated a tax on imported oil as a way to "internalize" its security costs. "I think that's interesting," said Daniels, who allowed that some in the audience may not like it. Then he turned to Kahn's advocacy of a tax code that combined a flat income tax with a standard deduction with a value-added tax. That appealed to Daniels, too, though we'll see if a European-style VAT will take off among conservatives anytime soon.

The closest Daniels got to mentioning Barack Obama, liberals or Democrats came while he was chiding conservatives who fret that a society where so few people pay federal income taxes and so many receive government benefits cannot prosper. "Leave that thinking to the statists," he said, arguing that pessimism about the American people didn't fit conservatism. The filet mignon served at the event was the only red meat the audience got.

At the end of the evening, Hudson passed out a bound collection of Kahn's writings. The title? "In Defense of Thinking." It sounded like the sort of thing you might find at a Cambridge bookstore rather than amid the wildlife at an Indiana bar. But however much Daniels likes Kahn's books, the votes are in Indiana's bars, and they don't care if pointy-headed intellectuals think it's a bad idea to pet the bear.

The constitutionality of the individual mandate, cont'd

Reader JB responds to Bill Dailey's defense of the Supreme Court's impartiality:

I had a professor in law school who one day handed out the text of a law, and a description of a situation. He gave the class a few minutes to read.



His first question was, "If you wanted this law to apply to this situation, how would you argue that?" Hands went up, and people set out arguments for why the law applied.



His second question was, "If you wanted this law to not apply to this situation, how would you argue that?" More hands, and people arguing that the law did not apply.



Third question: "So does the law apply, or not?" There were several answers from people who felt strongly that it did or didn't apply. He kept asking for more responses until someone said, "Whether it applies depends on whether the judge wants it to apply."



He raised his eyebrows and nodded.



"I tell you now, the great secret of the law," he said quietly. "All laws are written this way."

The Treasury's defense of HAMP

My column this morning was not kind toward the Home Affordable Modification Program, or HAMP. When officials from Treasury called to press their case, I suggested a Q&A format so that you all could hear their argument. The participants were Phyllis Caldwell, chief of the Treasury Homeownership Preservation Office; Tim Massad, acting treasury assistant secretary for financial stability; Steve Adamske, treasury deputy assistant secretary for public affairs; and Mark Paustenbach, treasury spokesman. An edited transcript follows.

Ezra Klein: The conventional wisdom is that HAMP failed. It helped many fewer people than we'd projected, spent barely any of its money, and ended up converting fairly few of the trial mortgage modifications into permanent modifications. Is any of that wrong?

Phyllis Caldwell: You have to think about HAMP in the context of who it was supposed to help and why. It set a framework for evaluating mortgage modifications that moved the industry to a standard modification able to reduce payments and gave more than a million homeowners immediate relief through trial modifications that had the potential to become permanent. So what it set out to do worked. What has been disappointing were the number of people who qualified for modifications. Some of them were not who the program was meant to serve. They were already paying less than 31 percent of income on their mortgage or they could not verify the income they said they had or they could not keep up with payments during the trial period.

That implies that the problem was that your view of the housing market was too optimistic when we created the program, and HAMP's underperformance is a function of homeowners being in worse shape than you'd thought?

PC: I wouldn't say a more optimistic view. If you think about when HAMP was started, the issue facing the mortgage market was a reset of subprime loans where many homeowners would experience huge rate shocks that would make their homes unaffordable. HAMP was set up to look at those payments, have a standard way to restructure those mortgages and make them more affordable.

Steve Adamske: Remember that some of these people were legitimate victims of predatory lending. It was in part designed to help people duped into mortgages that were going to reset at much higher rates and to try to correct that problem at some level. But the longer we're going along here, the problem we're finding with foreclosures is unemployment, which HAMP can't address.

PC: Right. And only part of the strategy for blunting the pain of resets was HAMP. It was also the decrease in interest rates over all which kept the resets from being so bad. But now the problem has moved to being unemployment and negative equity, and that's not what HAMP was set up to address.

Run me through the numbers here. How many people did HAMP reach?

PC: There've been roughly 1.3 million trial modifications. You have to remember that up until June of 2010, folks could open into a trial modification by simply calling up and asking for it. After June, we began checking their incomes before they entered the program. There have been about 460,000 permanent modifications.

A criticism of HAMP is that its three-month trial period ended up hurting a lot of people. They got their payments lowered for a few months and then their bank just left them hanging, or they got kicked out, and now they had to pay the difference, or they'd been holding on in a community with no jobs for longer than they needed to.

PC: There are instances of that. It's important to remember that the focus was for people who wanted to stay in their homes and there may have been some cases where people believed or hoped that their circumstances would change and so they stayed in the trial hoping their circumstances would change but they didn't. But it's not fair to say they are worse off than they were because of HAMP. They owed what they would've owed anyway.

In some sense, your defense of HAMP seems to be that, well, the situation was worse than we thought. So are there further programs or changes you wish you'd made?

PC: As we go through the year on HAMP, you have to go back to where we were at the time. It has taken a long time for the entire industry to adjust to the huge need for mortgage modifications. But every change we've made in making the program better is met with an argument that it's changing so fast we can't keep up with it.

SA: There's a moral hazard in this issue as well. Your editors and people in your industry would be salivating for the Lexus owning and beachfront property types who would get help if we opened the program further. We have to go for a middle ground where we get the people deserving of help so there's no accusation of free lunches. The challenge is figuring out how to scale a program so you're doing enough and trying to address the problem without doing so much that you create a big moral hazard problem and use taxpayer money unwisely. That's why we only paid out funds when there was success. That helped us be responsible. So we still think it was properly designed, given the need to scale it in that way.

Was HAMP too friendly to the banks? Why not empower the housing counselors rather than letting the mortgage-holders sign up for this program voluntarily?

PC: When we talk about HAMP or mortgage modification, it's important to know that only 15 percent are owned by banks. The rest are Fannie, Freddie and investors. People see it as the banks not modifying, but it's really banks and servicers working on behalf of investors. And then we need to include the effect HAMP has had on the industry in creating a model for reducing payments on mortgages. Before HAMP, only a third of modifications were reducing payments. Now it's above 70 percent.

Mark Paustenbach: And you know why the program was voluntary, right? We didn't have the authority to unilaterally open up these contracts and change them. That would've been illegal. So we needed a program where we could get the servicers to participate and agree to do the modifications voluntarily.

SA: When you talk about forced bankruptcy modifications [like cramdown], it failed in Congress. It wasn't politically feasible.

But didn't HAMP need the stick of forced modifications to work?

PC: Remember that private mortgage modification has changed a lot in part because of HAMP. It set a framework for that. Within the HAMP program, over 1.3 million have had a chance at modification. But when you look beyond HAMP at the private mortgage modification industry, modifications continue to exceed foreclosure sales on a 2:1 basis. Modifications have worked. But they can't stop foreclosures totally because there are some people for whom it's not avoidable. So the number of people eligible for a HAMP modification was less than we thought at the beginning, but a lot of people have been helped, and we've moved the modification industry from being somewhat predatory to stable and helpful.

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Dissents: The constitutionality of the individual mandate

Bill Daley, a visiting associate professor at Notre Dame Law School, e-mailed this reply to my earlier comments on the constitutionality of the individual mandate. I'll respond in a subsequent post. As an aside, I try to read the comments, but it's easier for me to keep track of e-mail, so if you have something you want me to see personally, e-mail is often better.

You have written more than once now that the "abstract constitutionality" of the Health Care Bill is not what's at issue, just the party affiliation of the judge deciding the case. I don't really get what that's supposed to mean. Is it your view that when judges have persistent disagreement about issue x, the arguments are ipso facto not about issue x but about something else?

Take, for instance, the area of sentencing law in criminal cases. A series of cases around sentencing have for years been decided in a "pro-defendant" (we might say "liberal") direction since Justice Thomas joined Antonin Scalia, Ruth Bader Ginsberg, John Paul Stevens and David Souter. Leading the dissenters has been Steven Breyer, as the cases deal with the constitutionality (among other things) of the federal sentencing guidelines (of which Breyer was a leading proponent). Now, these cases were pretty predictable, but the predictability did not map onto partisan affiliation but the methodological preference (or not) for formalism among the justices. The formalists were winning. It remains to be seen what will happen with two new Democratic appointees on the court. But it will be their methodology in such cases, not their party affiliation, that will determine the outcome. Does this mean the cases are not "really" about the constitution, as you think with health care? Or are the disagreements about the constitution unless the divide is neatly partisan?

The Supreme Court justices agree by 7-2 or better some 90% of the time or so, as I recall. There are a narrow band of high-profile cases in which the disagreements are real and persistent and frequently predictable along partisan lines. That should not be surprising, and nor should it lead to the cynical view that what's going on is just politics by other means. The methodological differences are real and in good faith, even if they've largely been sorted out by political groupings (as is inevitable, one supposes, in a system of presidential appointments).

For what it's worth, conservatives differ pretty widely on the question of the health care bill, mostly depending upon how faithful to some original vision of the constitution they think the Supreme Court ought to be (of course, one can also differ on that original vision), but also depending upon their reading of the current doctrine. I hold, as do most folks that I know, that this law is well within the ambit of what we've approved of, and highly unlikely to be questioned by this Supreme Court except perhaps by Justice Thomas (who is the most willing to throw precedent overboard when he's convinced it gets a fundamental constitutional point wrong). But other conservatives think we misread current precedent, or that the issue is just different enough to warrant a fresh look at Commerce Clause jurisprudence without disturbing many precedents -- they are distinguishable. But these are good-faith methodological arguments among conservatives (as the sentencing commission arguments were among both liberals and conservatives).

I do not think it serves you well to keep writing what seems just an empty and cynical statement that when cases are predictable along partisan lines then it's not about the law at all. It may be true that in some categories of cases partisan politics is a helpful predictor of results, but as a matter of describing what both the liberal and conservative (the labels, as the sentencing cases show, are hardly perfect) are actually doing in deciding the cases it does their work and our system an injustice.

Stop whining

I'm much closer to Ross Douthat's view of the White House than, well, the White House's view of the White House.

(Late) lunch break

Ze Frank does TED!

Man, I really miss this guy's show. I tend to think of lunch breaks as pretty optional entertainment. And, technically, this one is to do. This blog does not have the power of coercion. But it's really worth watching. The end, in particular, is beautiful.

Bernanke answers half the question

With both employment and inflation far undershooting the Fed's targets this year, the big question has been whether the central bank will act. Today, at a monetary conference in Boston, Ben Bernanke offered a partial answer. The Federal Reserve is back in the game. What we don't yet know is how hard it'll play.

The problem for the central bank is that it doesn't really know how to play the game it finds itself in. The Federal Reserve is used to handling high inflation. You crank up interest rates, slowing the economy and bringing inflation down. It's also used to dealing with a weak economy in normal economic conditions: You lower interest rates and get the economy moving again. Neither strategy is applicable now.

What the Federal Reserve is not prepared for, Bernanke said in Boston, is dealing with persistently low job growth and inflation when it's already dropped interest rates as far as they can go. "Monetary policymaking in an era of low inflation has not proved to be entirely straightforward," he sighed. But the fact that bankers might wish for a more straightforward situation doesn't mean they can sit the crisis out. "Central banks, for the first time in many decades, [have] to take seriously the possibility that inflation can be too low as well as too high."

And the Fed does have other tools. The two Bernanke suggested he'll use are buying large amounts of long-term securities, which brought down interest rates during the crisis, and committing to keep interest rates low for an extremely long period of time. The problem, he admitted, is that "we are still learning about the efficacy and appropriate management of these alternative tools."

Which suggests the Federal Reserve will be cautious. And that can be a problem of its own. If the Federal Reserve intervenes but does too little and it has no effect, it will lose credibility amid fears that it cannot effectively backstop the economy. Jan Hatzius, Goldman Sachs's chief economist, worried over this dynamic at a fiscal policy conference earlier this month. "In this kind of situation," he said, "stimulus tends to be underprovided compared to what's necessary. I think we'll do quite a lot, but it will still fall short of what we need." It's up to Bernanke to prove him wrong.

Photo credit: Steven Senne/AP.