Fed Chairman Bernanke is the New Maestro

by John M. Curtis
(310) 204-8700

Copyright December 6, 2010
All Rights Reserved.                                

              When Federal Reserve Board Chairman Ben S. Bernanke took the reins Feb. 1, 2006 from former Fed Chairman Alan Greenspan some doubted whether the former Princeton economics professor was up to the task.  Nearly five years later, navigating through the worst economic disaster since the Great Depression, Bernanke answered his critics.  Even Greenspan, known as the “maestro” for his masterful 19-year control of the U.S. economy, had critics during times of economic upheaval.  Beranke has come under fire on the political right for a liberal monetary policy that has devalued the dollar and tolerated large budget deficits.  Bernanke’s critics, on both sides of the Atlantic, have warned about hyperinflation, especially since announcing plans Nov. 19 to buy $600 billion more of U.S. Treasures.  Unlike his critics, Bernanke doesn’t see inflation as today’s pressing problem.

            Beranke’s read of the economic data indicates the U.S. faces years of slow growth and high unemployment.  He estimates that it could take five or six years before the nation’s unemployment rate returns to the five or six percent range.  “This fear of inflation I think is way overstated,” said Bernanke, answering his critics that continue to draw parallels to the pre-WW II Weimer Republic, where Germans carried wheel barrels of Deutsche marks to buy a loaf of pumpernickel.  Skeptics point to today’s inflation in commodity prices where precious metals, especially gold, continue to hit unprecedented levels.  Bernanke sees the Feds’ job as one of providing stimulus to the economy by way of low interest rates and liquidity to banks.  Today’s biggest Capitol Hill debate involves whether to extend the Bush-era tax cuts, something Republicans say is needed to stimulate the economy.

            Republicans can’t have it both ways:  Criticizing Bernanke for keeping low interest rates while, at the same time, advocating more across-the-board tax cuts.  Given the sick economy, Bernanke has done the right thing keeping the Federal Funds rate between zero and .25%.  Unlike 1600 Pennsylvania Avenue or Capitol Hill, Bernanke has no political agenda, only to do what’s best for the economy.  When Democrats got creamed in the Nov. 2 midterm elections, President Barack Obama lost more clout on Capitol Hill.  He’s currently engaged in feverish negotiations with Republicans to extend the Bush-era tax cuts and renew expiring unemployment benefits for some 2 million displaced workers.  Obama had wanted to raise rates 5% for only those individuals earning over $250,000 a year.  Since many small businesses fall into that category, Barack has decided to go along with the GOP.

            With unemployment running about 9.8%, Bernanke sees no quick fix to the nation’s anemic economy than continuing to stimulate with low interest rates and adding reserves to the banking system by buying up U.S. Treasuries.  ”What we’ve been doing is lowering interest rates by buying Treasury securities,” said Bernanke, insisting that as soon as Gross Domestic Products grows beyond its sluggish 2.5%, he’s willing to readjust monetary policy and treasury purchases.  Partisans on Capitol Hill like to grandstand taking shots at the Fed Chairman.  They have no answers for how they expect to reduce unemployment other than promising Keynesian public works projects, outlays that tend to add to budget deficits.  Neither the White House not Congress has any real answers for how to deal with the loss of manufacturing jobs, mainly to foreign competitors in Asia.

            Keeping low interest rates isn't only one strategy for stimulating the U.S. economy.  Bernanke knows that Wall Street must also cooperate by keeping markets rising out of the hands of short selling hedge and private equity funds.  When the Senate passed sweeping financial reform legislation July 15, there was no restriction placed on hedge and private equity funds to curtail short selling, especially in financial stocks that took Bank of America stock under four dollars a share Feb. 5, 2009, in the trough of the nation’s biggest financial meltdown since the Great Depression.  Bernake knows that to improve the private sector employment picture, the stock market must continue to rise, not something helped by short selling hedge and private equity funds.  Treasury Secretary Tim Geithner and Bernanke have a lot more work convincing Congress it’s time to regulate hedge and private equity funds.

            Bernanke has made all the right moves bringing the economy up from the worst calamity since the Great Depression.  While the county is not out of woods yet, there are signs of improvement including last week’s slight drop in unemployment claims.   “One myth that’s out there is that what we’re doing is printing money,” said Bernanke answering his biggest critics, like former GOP presidential candidate Rep. Ron Paul (R-Tx.).  “We’re not printing money.  The amount of currency in circulation is not changing.  The money supply is not changing in any significant way,” apart from the fact that the Fed added about $15 trillion to the banking industry since financial markets crashed in October 2008.  With only limited leverage, the Fed must work with the Treasury Department to bring about real financial reform.  Currently unregulated hedge and private equity firms can’t be allowed to sabotage the economy.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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