Bernanke can't fix it alone

The U.S. economy is haunted by joblessness and President Barack Obama is at loggerheads with congressional Republicans over what to do about it. So who are you going to call?

Lately, it seems, the answer is the nation's central bank -- the Federal Reserve, headed by a former Princeton economist, Ben Bernanke, who in the face of our economic demons is the last exorcist standing.

Just how much is riding on the Fed is clear from the criticism it faces across the political spectrum. Texas Gov. Rick Perry, seeking the Republican presidential nomination, said it would be "almost treasonous" to print money between now and the election, and "we would treat him pretty ugly down in Texas" if he did so. Rep. Barney Frank (D-Mass.) meanwhile has complained that the Fed is being prevented from doing more to revive the economy because banks, which hate any whiff of inflation, have too great a voice in picking members of the Fed's crucial interest-rate setting panel.

These criticisms miss the point. Inflation, the potential outcome of issuing too much money, is the least of our worries in such a sickly economy. Nor does it matter much that banking influence might be holding the Fed back from further aggressive action, for the truth is that there isn't much left the Fed can do. Economies simply aren't revived by monetary policy alone.

The Fed's real failing was not reining in reckless lending by banks when it had the chance. That helped bring about the financial crisis of 2008 and our troubles today. But since then, the Fed has performed as well as anyone could hope. When the global financial system was approaching meltdown, the low-key Bernanke slept at night in his office to steady the system. His bold and imaginative intercession ultimately defused the crisis.

Perhaps partly as a result, people have looked to the Fed to reverse the brutal aftermath as well. And it's no wonder. Ever since the larger-than-life Paul Volcker vanquished inflation as Fed chairman in the early 1980s, Fed chiefs have occupied an outsized role in public life. Volcker's successor, Alan Greenspan, was seen as a kind of economic dog-whisperer, taming an unruly economy with mystical insights and subtle interest-rate adjustments. At least that was his reputation until the financial crisis led to a sharp devaluation of his legacy.

Unfortunately, the Fed's arsenal of monetary and political ammunition is mostly expended, and the stock market, which tumbled last week, probably senses this. Oh, the Fed can help a little. Just last week, a divided Fed announced it would try to force down longer-term rates by buying long-term government bonds with proceeds from the sale of shorter-term bonds. The hope is that the move -- known as "the twist" for its 1960s origins -- will send lower long-term rates rippling through the economy in the form of cheaper mortgages and other loans.

The Fed could also launch QE3, or a third round of "quantitative easing." This would entail "printing" money to purchase bonds, thereby injecting more funds into the economy and exerting further downward pressure on interest rates. And the Fed could stop paying interest on bank reserves. Taking away this .25 percent might prod banks into lending more in search of higher returns.

But there's already lots of money in the economy, and rates are already quite low. The problem is that businesses lack demand for their products, while consumers are too indebted (or in many cases jobless) to spend or borrow more. So even a flood of new money won't help much. In a vivid metaphor for monetary futility, economists call the Fed's dilemma "pushing on a string." And it's doubtful pushing harder will yield better results.

The good news is that, as a lender of last resort, the Fed has the weaponry to fend off financial Armageddon, should it come to that. And there is little doubt Bernanke would use it, and perhaps even invent some if necessary. But hauling the economy out of its current slump is a different problem, and some of the solutions lie elsewhere in Washington.