Bloomberg News

Bernanke Says U.S. Needs to Relearn Value of Budget Discipline

September 28, 2011

Sept. 28 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. should learn from the success of many emerging market economies and support strong economic growth through responsible fiscal policy.

“Advanced economies like the United States would do well to re-learn some of the lessons from the experiences of the emerging market economies, such as the importance of disciplined fiscal policies,” Bernanke said in prepared remarks for a speech today in Cleveland.

Bernanke echoed a theme from his remarks last month in Jackson Hole, Wyoming that “most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” He didn’t address the outlook for the U.S. economy or monetary policy in his remarks on “Lessons from Emerging Market Economies on the Sources of Sustained Growth.”

The speech is Bernanke’s first since the Fed announced last week that it would replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and strengthen the flagging U.S. economy.

The so-called Operation Twist drew three dissents as Bernanke struggled to build consensus behind plans to spur an economy weighed down by 9.1 percent unemployment. U.S. growth has flagged even as the Fed purchased $2.3 trillion in assets in two rounds of quantitative easing and held interest rates near zero since December 2008.

The experience of emerging markets shows “the need to encourage private capital formation while undertaking necessary public investments,” Bernanke said. He also cited open trade, investment in education and technological advances and a regulatory framework that “encourages entrepreneurship and innovation while maintaining financial stability.”

Bernanke’s speech reviewed the recommendations of John Williamson, an economist and senior fellow at the Peterson Institute for International Economics, a set of guidelines known as the Washington Consensus.

During the U.S. recession from December 2007 to June 2009, the BRIC nations of Brazil, Russia, India and China became the engines of the global economy, with Chinese gross domestic product expanding 7.9 percent even as the U.S. was still contracting.

While emerging countries produced about 85 percent of global economic growth since then, China, India and Brazil are slowing after they lifted interest rates to curb inflation following at least $870 billion of fiscal stimulus during the financial crisis.

“Over time, as the emerging market countries become wealthier and technologically more sophisticated, they will gradually lose the advantages of starting from behind,” Bernanke said.

Both emerging markets and advanced economies will have to “do their part” to reduce global imbalances, Bernanke said.

-- Editors: James L Tyson, Chris Wellisz

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net Mark Niquette in Columbus, Ohio, at mniquette@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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