Fed Chairman Bernanke Will Remain; Expect More of the Same

Ben S. Bernanke will serve a second term as chairman of the Federal Reserve. Last Tuesday, when President Obama announced the decision, he praised Bernanke, a Republican first appointed by President George W. Bush, for his “bold action and out-of-the-box thinking,” saying it had helped the United States steer clear of another Great Depression.

Among the “bold actions” defining Bernanke’s first term were slashing interest rates almost down to zero, lending astronomical sums to banks and businesses, and steering the Fed to finance the mortgage market almost single-handedly. The trouble is that these extreme measures cannot be sustained for long and will eventually make matters much worse.

The Fed is wedged between a rock and a hard place. If it reverses these myopic policies too quickly, it risks tilting the nation back into deflation, as happened in 1937 after the economy had begun to rebound. And if it attempts to maintain these practices much longer, it risks creating intractable inflation akin to that which the nation suffered in the 1970s, which would likely fuel another bubble.

Mr. Obama’s nomination is “a very short-sighted decision,” wrote Stephen Roach, a noted economist and chairman of Morgan Stanley Asia, last week. According to Roach, the credit given to Bernanke by some of his economic cheerleaders for his creative reactions to the financial meltdown may be premature, and he points out that Bernanke’s pre-crisis actions actually helped cause the very recession he is lauded for curing.

Roach highlighted three “critical mistakes” Bernanke made during his first term which underpin his belief that Bernanke should not be reappointed.

First, like his predecessor Alan Greenspan, Bernanke operated on the belief that monetary authorities are best positioned to address a bubble’s consequences rather than intervening to prevent the damage.

Second, Bernanke excused the bubble-prone tendencies of the U.S. with the “global saving glut” defense, blaming the surplus savers in Asia. “While there is no denying the demand for dollar assets by foreign creditors,” Roach wrote, “it is absurd to blame overseas lenders for reckless behavior by Americans that a U.S. central bank should have contained.”

Third, Roach says Bernanke is “steeped in the Greenspan credo” that free markets know better than regulators. But, as Bernanke knows, the markets have never been “free,” and in this case were heavily distorted by government social policy—policy that caused the bubble in the first place.

“[H]e lacked the foresight and courage,” Roach summarized, “to resist the most reckless tendencies of the era of excess. The world needs central bankers who avoid problems, not those who specialize in post-crisis damage control. For that reason alone he should not be reappointed.”

The announcement last week that the budget deficit will be greater than figures given in previous projections exemplifies the government’s accelerating fiscal woes, and illustrates the compounding problems that Bernanke will be managing for a second term.

The Fed’s debt-fueled spending binge in recent months may have brought a period of apparent calm to an economy facing free fall only months ago, earning Mr. Bernanke the confidence of the nation. The perception has taken hold among many pundits—Mr. Roach being an exception—that the current period of relative stability proves Mr. Bernanke’s ability to steer the nation steadily back to prosperity.

While Fed policies are being given credit for averting a more severe economic crash, common sense makes plain that no nation can borrow and spend its way out of bankruptcy. Such a sanguine view of government indebtedness is dangerously shortsighted, and the blind confidence heaped upon Mr. Bernanke will soon prove unfounded.

For more on the true condition of the American economy, read “America’s Financial 9/11.”

For many years, we have reminded our readers of Herbert W. Armstrong’s warnings that the people of America would wake up one day to find a collapsed economy, a devalued dollar, and skyrocketing inflation. These trends are already materializing.