Many prognosticators predict a recession this year that will be worse than the mild downturn of 2001. Fed Chairman Ben Bernanke gave that view some support Thursday.

Mr. Bernanke said “both fiscal and monetary policy face some additional constraints” relative to the start of this decade, he told the Senate Banking Committee.

In 2001, the federal government had a sizable projected surplus; it now has a deficit. In early 2001, inflation was 3.7%. Now, it’s 4.3%.

In addition, he pointed out that the negative effects of the stock market decline of 2000-2002 fell mostly on firms who pulled back on investment as a result. “In this case the consumer is taking the brunt of the effect,” because the asset in question is houses which are more important than stocks to the typical household.

Still, Mr. Bernanke has said he doesn’t project a recession this year. –Greg Ip

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Future Macroeconomics students - notice the concepts of fiscal and monetary policy!!!!

"Some additional constraints" - Fed speak for ... might be impotent!  Realize with respect to Monetary Policy, that if the fed funds rate is now 3%, there isn't a huge amount of room to decrease interest rates.  Furthermore, we have that problem of foreigners owning a huge amount of our debt ($2.35 trillion - if you remember from class last week, Brazil was one of the surprises to MY eyes - increasing from a paltry $52 billion to $129 billion, they passed the Oil Exporting Countries as a group who now own $126 billion of our debt and are now down to 5th place).

Fiscal policy - well, a projected $400 billion deficit for the current fiscal year ending Sept. 30, 2008 isn't the surplus we had in 2001.  However, I personally have yet to see a deficit get in the way of a determined Congress and President who really WANTED to spend money (or cut taxes)!