Bernanke's 'Bullets' are Blanks, Mark Dow Says: "The Fed Is Pushing on a String"

Sunday on "Meet the Press," Treasury Secretary Tim Geithner weighed in on the great debate that's gripped policy wonks and economists in recent months: Should the government follow Europe's path toward austerity or spend more money to combat high unemployment and a sluggish recovery?

"We think there's some more things Congress can do to, again, to help reinforce this recovery," Geithner said, according to the transcript. "But we're in a transition...from the extraordinary actions the government had to take to break the back of this financial crisis to a recovery led by private demand... we have to make this transition to a recovery led by private companies."

I spoke about this "great debate" on Friday with Mark Dow, a fund manager with Pharo Management, which as about $3 billion of assets. Prior to joining the buy-side, Dow was a staff economist at both the IMF and Treasury so has much more experience in economic policymaking than most money managers -- even if everyone on Wall Street is now keenly focused on the subject.

The Fog of Ideology

"It's been boiled down to ‘yes or no' and people map it back to their ideology," Dow says. "It's not clear whether or not we need [more stimulus]. If you put a gun to my head I'd say we probably need it but unfortunately, politically, I think we're going to need to see more pain before people will give it support because it's not a popular notion."

Dow spoke ahead of Geithner's "Meet the Press" appearance but after Fed chairman Ben Bernanke's Congressional testimony last week, which boiled down Bernanke's attempt to reassure markets that "the Federal Reserve does have the capacity -- the tools -- should deflation occur, to reverse it."

But Dow took umbrage with the general view that the Fed chairman has more bullets in his policy gun. " I think they're blanks," Dow says. "The Fed is pushing on a string."

Stimulus at the Limits

The idea the Fed is powerless to prevent further economic weakness, i.e. ‘pushing on a string', is very frightening to most observers. But Dow's economic outlook isn't that dour despite his skepticism about the effectiveness of more monetary stimulus, as we discuss in the accompanying clip.

On a semi-related note, the immediate reaction to Geithner's comments this weekend were twofold:

Geithner saying the private sector needs to do more doesn't make it so.

Geithner is admitting the administration doesn't have the political capital (or will) for more stimulus.

But perhaps there's a third explanation, which runs along the same theme as Dow's comments on the Fed. Perhaps Geithner is admitting, tacitly of course, that the government can't really do any more than it's already done; that more spending just means more money down the deficit rat-hole?