President Obama made a solid choice this week to reappoint current Federal Reserve Chairman Ben Bernanke to a second four-year term. His initial four-year appointment by then-President Bush expires on January 31, 2010.
We noted in our Tea Leaf issue dated July 29 that such a move to reappoint Bernanke would be a wise choice. His reappointment was also supported by roughly 90% of forecasting economists. Changing horses in mid-stream is not usually a good idea…and especially this time…given the depth, slippery rocks, and icy temperatures that “Captain” Bernanke is currently steering the economy through.
The President noted that Bernanke “has led the Fed through one of the worst financial crises that this nation and this world have ever faced. As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”
The Fed Chairman thanked the President for his “unwavering support for a strong and independent Federal Reserve.” Bernanke pledged “to help provide a solid foundation for growth and prosperity in an environment of price stability.”
Challenges Ahead
This reappointment, as well as Bernnake’s use of key terminology, was critically important because of the tough course that is yet to be followed by the Fed. At some point, the Fed will begin to withdraw much of the temporary monetary stimulus that has helped to stabilize the economy and financial markets.
These moves will be more of a two-step process than ever before. Unprecedented moves by the Fed, grouped under the banner of “quantitative easing,” have been undertaken during the past two years to help domestic and global financial markets return to some level of normalcy.
Many of these moves have had the desired effect. Other markets remain more limited in scope and volume, requiring a continued Fed participation.
More public will be the Fed’s first moves, expected by most forecasters sometime during mid-2010, to increase the federal funds rate from the record low target level of 0.00%-0.25%, which has been in place since mid-December 2008.
Rising Criticism
A possible series of modest tightening moves next year could draw strong Congressional criticism as it pushes financing costs higher. The Congress would make the case that “the Fed is taking the punch bowl away from the party just when the party in getting going.”
Come to think of it, the Congress ALWAYS complains when the Fed is pushing its key interest rate higher. Such moves could also draw criticism from the Administration, although such views would likely be expressed behind closed doors.
At this same time of rising tensions between the Fed and our illustrious elected representatives, Bernanke is very likely to be increasingly critical of the enormous budget deficits now expected. He will make it clear that deficits of roughly $1,000,000,000,000 annually during the next decade are simply not affordable and would do great damage to this nation…
…touché
Jeff Thredgold is an economic consultant to Zions Bank
Featured in the 26 August 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.
Image used under creative commons.
Yes, raise interest rates most definitely need to go up.
What would be even better is if we didn’t have a central bank and after a short corrective deflation stabilized our new commodity backed currency, we would allow banks to compete against one another by setting their own interest rates, encouraging saving and discouraging reckless borrowing! …like the founding fathers intended. I wonder what Andrew Jackson would think of having his face on a Federal Reserve note(!)
While I agree at this point, that its probably in the best interest of the economy that Ben Bernanke was reappointed so as to not rock the boat too much, I am not happy that we have had a Central Bank that has errored on the side of too much liquidity over the years. Abolish the Fed is what I’d vote for but that isn’t going to happen any time soon.
Before we give Bernanke too much praise, the Federal Reserve is where a lot of the blame for the mess we’re in should come from. We’re in a financial crisis. The Federal Reserve is a financial institution.
First Alan Greenspan’s answer to the tech and Nasdaq stock bust in 2000 was to lower interest rates to 0.5% and not only that keep them there for over a year and suggested to home owners to take out variable rate interest loans…..some pretty weird advice.
Result: A real estate bubble.
If it wasn’t for the Federal Reserve holding interest rates so low and below the rate of inflation for so long, it may have not fueled a huge credit, debt, and speculative bubbles either.
The problem with asset bubbles is that they always pop and the pain of their bust is proportional to that of the boom. The bigger the boom, the bigger the bust. We’re in a big bust right now.
Now we find the Federal Reserve and the government trying to fix this problem with more money (easy credit, stimulus, bailouts, etc) as a cure but in reality is the same thing that got us in trouble in the first place and that is more debt. Time is the only cure.
The Federal Reserve also thinks they can remove all this liquidity before it becomes a problem (inflation)…..and what is such a hoot is they say it’s their job to control inflation when they are the ones that created it in the first place. Time will tell if they can remove the liquidity in time. It may just turn out that defaults, deleveraging, and derivatives blowing up cause more deflation than the massive monetary injections can absorb.
Now we have a bailout bubble that will have to burst in the future. I’m starting to get nervous about the future value of the dollar, and our AAA bond rating, among other things such as an impending depression.
As a non financial person (just an engineer), can you tell how disgusted I am with our financial economy now that the real economy has been decimated and the vacuum left behind filled by financial engineering of derivatives and all these fancy instruments designed to make those financial people tons of money? Our fiat money system is full of greed, corruption, dishonesty, etc.
This is why we’re having tough financial times. Keep in mind that the people that didn’t see it coming and were responsible for it in the first place are going to also fix it. (sarcasm added). I don’t think so. Student of the great depression or not, Bernanke isn’t going to prevent what needs to happen to cleanse the system. He may be able to delay it, that’s all.
You cannot believe a lot of what Bernanke says. Here’s proof:
http://www.youtube.com/watch?v=5PLBwH0iziQ&feature=related