Fed Chief Punts, Orders Pina Colada

When one has no clue what to do, it's best not to do or say anything notable or quotable. Fed Chairman Bernanke followed that rule today. Instead of signaling anything about monetary policy, he gave a political speech:

Mr. Bernanke didn't comment on monetary policy, instead addressing issues concerning the "unprecedented" pace of global economic integration, giving traders who delayed their end-of-summer vacations for the speech -- just in case the Fed chief dropped any bombshells -- the all clear to abandon ship.

"The market didn't get any sense of direction from Bernanke," said Hugh Johnson, chief investment officer at Johnson Illington Advisors. A lack of major economic or corporate news has left "the markets very directionless," he said.

Well, at least we can all enjoy our Labor Day vacations. Oh, and speaking of Labor Day, what did Bernanke have to say in his homily (bloldface emphasis added):

The current episode of global economic integration is moving at an unprecedented pace, forging the basis for productivity growth and a reduction in global poverty, Federal Reserve Chairman Ben Bernanke said Friday.

But in prepared remarks to global monetary officials and private-sector economists, he urged policy-makers to make sure the benefits of globalization are widely shared in order to stem protectionist sentiment.

"Economic and technological changes are likely to shrink effective distances still further in coming years, creating the potential for continued improvements in productivity and living standards and for a reduction in global poverty," Mr. Bernanke said in a speech to the Federal Reserve Bank of Kansas City's annual conference in Jackson Hole, Wyo. (See the full text of Bernanke's prepared remarks¹.)

The subject of this year's event is globalization and its effect on policy. Mr. Bernanke's speech is his first at Jackson Hole since becoming Fed chairman in February.

He didn't address the economic and monetary policy outlook in his prepared speech. The Fed earlier this month paused its two-year tightening campaign with the Fed funds rate at 5.25%. Economists increasingly think the funds rate will peak there, though upcoming inflation and employment reports will be critical in determining the outcome of the September Fed meeting.

Mr. Bernanke noted in his speech that globalization, for all its benefits, leads to some dislocation among certain workers and firms, and "the natural reaction of those so affected is to resist change, for example, by seeking the passage of protectionist measures." He noted that current global tensions and terrorism risks also threaten to constrain globalization.

It's a frequent theme in my writing that I don't regard the notion of the "social responsibility of business" to be a punchline. I'm not a University of Chicago guy. I'm a Wharton guy. I do think that part of responsible business calculation involves assessing the impact of business decisions on people, their lives and their communities. I'm not an anti-WTO protester type, and neither am I one to evaluate strategic business options soley on the basis of what can be reflected numerically on an income statement during a given quarter.

Bernanke's speech is fine, and I expect that over the long term, globalization should lead to reduction in poverty, but if it does so, it won't be because of any magical invisible hand, it will be because leaders make responsible decisions about how to disseminate prosperity while simultaneously promoting safe and healthy working conditions, etc.

When we abdicate moral responsibility or thinking to some magical free market ideology, we take ourselves off the hook. There is always regulation. The fight is always over who benefits from the regulation, and whose voice is heard when the regulations are decided. Living within spitting distance of Washington, DC, perhaps I have fewer illusions about this than many others do.

It is highly profitable in a given quarter or year for businesses to seek out virtual slave labor across the world, and to fight against any trade barriers or regulations that might limit or blunt such exploitation. Making such virtual slave labor available bids down mass market wealth internationally, and the result is weakness in Western economies.

That's why the Fed is in such a bind today: the housing market is busting, the American middle class is weak and not highly prosperous in real terms by historical standards, consumer confidence may very well go south, and there's not a lot of broad economic strength or capital distributed throughout the population to forestall an ugly recession, especially when global energy prices may be set for continuing inflation due to diminishing global reserves and international instability. The Fed is flirting with that old bugaboo, stagflation, and rather than make any market signals, today we get a political speech.

Nothing's been solved, but hey: I, for one, hope to enjoy a lazy end of August.