I think too great a burden is being put on monetary policy to get us out of the woods. The options discussed by Bernanke at Jackson Hole all sound reasonable to me but are weak reeds on which to prevent a long period of slow growth or a double dip. I don’t think anyone should be worrying about inflation right now; and whatever risks are built into the need to eventually unload these assets on the Fed’s balance sheet, they are small compared to the risks of allowing the economy to stagnate or worse.

I hope that Bernanke can find a way to quietly – and behind the scenes – put some pressure on Congress to stop the ridiculous political posturing over deficit reduction vs. stimulus. We need both and there is no reason we can’t have both – just not at the same time. If the President’s fiscal commission can come up with a good package of spending cuts and revenue increases and Congress enacts them but phases them in after the economy recovers, then this might counter worries that we “can’t afford” any more stimulus. My favorite option would involve a VAT that is phased in slowly – thereby encouraging consumption now and savings later -- combined with an effort to enact some reforms in Social Security and some limits on tax expenditures, especially for those with higher incomes. But state governments and the unemployed need more help now to prevent some of the fiscal drag associated with the premature withdrawal of stimulus funds.

The economy is in deep trouble. Our elected representatives need to step up to the plate and not leave all of the problem on the Fed’s doorstep.

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One has to be struck by Mr. Bernanke’s tentativeness at Jackson Hole about the need for renewed Federal Reserve quantitative easing. At a time when all the evidence points to a rapid slowing in the US economy, Mr. Bernanke limited himself to exploring the Fed’s options in the event, were there to be a further dramatic slowing in the US economy.

Mr. Bernanke’s excessive caution is to be regretted given the mounting risks of both a double dip economic recession and of Japanese-style deflation in the US. One would have thought that Mr. Bernanke should be anticipating the fact that the strong support that the US economy has been receiving to date from the fiscal stimulus and from the inventory cycle is now due to rapidly fade. One would also have thought that Mr. Bernanke should be highly concerned about the strongest of headwinds that the US economic recovery now faces from the appalling state of the US labor market and from the ongoing foreclosure crisis.

The Federal Reserve’s tentativeness about a new round of quantitative easing is all the more to be regretted since monetary policy is now the only game in town. The option of another round of fiscal stimulus anytime soon would seem to be precluded by the highly compromised state of the US public finances and by the political cycle in the run-up to the November elections.

In mapping out the Federal Reserve’s options, Mr. Bernanke is correct to emphasize that in principle there is very much more that the Federal Reserve can still do through aggressive purchases of both public and private sector debt instruments. However, one would have thought that before embarking on private sector debt purchases, the Federal Reserve should actively purchase US Treasury bonds in general and US TIPS in particular in order to drive down US long-term government interest rates. By so doing, the Fed would also be driving down long-term private interest rates, which are linked to government borrowing rates. And it would do so without the associated risk of directly intervening in the private sector debt market.

To be sure, the Federal Reserve would be running risks in purchasing private sector debt instruments in the event that it was forced to do so. However, such risks would need to be weighed against the greater risk of having the US economy find itself mired in a prolonged period of Japanese style deflation.

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