FacebookTwitterGoogle+RedditEmail

Bernacke Could Face Serious Trouble

by MIKE WEISBROT

Ben Bernanke’s first promise upon being nominated for Chairman of the U.S. Federal Reserve was that he would “maintain continuity with the policies and policy strategies established during the Greenspan years.”

Of course, he was speaking to the financial markets, which tend to worship Greenspan and are rather jittery about change these days–as anyone sitting on the edge of a cliff and staring down into the abyss might be. But following in Greenspan’s hallowed footsteps might not be so easy, nor would it necessarily be the best thing for the U.S. economy. After all, it was Greenspan who persuaded Congress in January 2001 that President Bush’s proposed tax cuts were fiscally responsible, arguing that without them we would pay off the national debt too quickly. Oops! The gross federal debt for the current fiscal year is projected to be the highest in 50 years, at 67.5 percent of our GDP.

Alan Greenspan made some other mistakes that have cost the American people dearly, and others that have yet to come home to roost. After initially warning of “irrational exuberance” in the stock market in December 1996, he reversed himself and allowed the stock market bubble to inflate to unsustainable levels. Millions of Americans lost much of their retirement savings in the ensuing, predictable crash.

When the stock market bubble burst and triggered the recession of 2001, the recovery was fueled by an already established housing bubble that has now created more than $5 trillion of excess wealth. The Greenspan Fed helped this bubble along, too–although recently Mr. Greenspan has started to talk about it. But when this bubble bursts it will almost certainly cause a recession, and we will wish that the Fed had warned the public more clearly–and earlier–about the dangers of over-inflated home values.

Bernanke says that he, like Greenspan, doesn’t see bursting asset-market bubbles as the Fed’s responsibility. But the Fed Chairman testifies regularly on the state of the economy, and the Fed is the major regulator of the country’s economic activity. It makes no sense to say that the Fed can warn of the dangers of inflationary pressures, give advice on spending and tax policy and everything under the sun, but must remain silent when a speculative frenzy poses an economy-wide threat to the nation.

The Fed can cool off a bubble without having to raise interest rates and thereby dampen other economic activity. For example, to deal with the housing bubble, all the Fed Chairman would need to do is explain the reality: since 1996 house prices nationally have increased more than 45 percentage points after adjusting for inflation. From 1950-1995 house prices increased at the same rate as inflation. It is easy to show that this sharp break with the past is the result of a speculative bubble. If the Fed won’t do this, who will?

Bernanke seems less politically aligned than his predecessor, so he is less likely to imitate Greenspan’s endorsement of such partisan plans as Social Security privatization. He is qualified for the job. But he is inheriting some serious economic imbalances. In addition to the housing bubble and the near-record levels of federal debt, we have an unsustainable trade deficit and a much overvalued dollar. The interest rate on long-term (10-year) U.S. Treasuries is being held down by Asian central banks’ buying them, which could slow any time and drive these rates (which the Fed can’t directly control) upward. This would probably pop the housing bubble. And then there is inflation, the Fed’s main enemy, which was running at 9.4 percent annually over the last quarter. Ouch. Bernanke will be lucky if he makes it through his first two years and still has a job.

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. He is the author, with Dean Baker, of Social Security: the Phony Crisis. He can be reached at: weisbrot@cepr.net

 

 

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. and president of Just Foreign Policy. He is also the author of  Failed: What the “Experts” Got Wrong About the Global Economy (Oxford University Press, 2015).

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

March 29, 2017
Jeffrey Sommers
Donald Trump and Steve Bannon: Real Threats More Serious Than Fake News Trafficked by Media
David Kowalski
Does Washington Want to Start a New War in the Balkans?
Patrick Cockburn
Bloodbath in West Mosul: Civilians Being Shot by Both ISIS and Iraqi Troops
Ron Forthofer
War and Propaganda
Matthew Stevenson
Letter From Phnom Penh
James Bovard
Peanuts Prove Congress is Incorrigible
Thomas Knapp
Presidential Golf Breaks: Good For America
Binoy Kampmark
Disaster as Joy: Cyclone Debbie Strikes
Peter Tatchell
Human Rights are Animal Rights!
George Wuerthner
Livestock Grazing vs. the Sage Grouse
Jesse Jackson
Trump Should Form a Bipartisan Coalition to Get Real Reforms
Thomas Mountain
Rwanda Indicts French Generals for 1994 Genocide
Clancy Sigal
President of Pain
Andrew Stewart
President Gina Raimondo?
Lawrence Wittner
Can Our Social Institutions Catch Up with Advances in Science and Technology?
March 28, 2017
Mike Whitney
Ending Syria’s Nightmare will Take Pressure From Below 
Mark Kernan
Memory Against Forgetting: the Resonance of Bloody Sunday
John McMurtry
Fake News: the Unravelling of US Empire From Within
Ron Jacobs
Mad Dog, Meet Eris, Queen of Strife
Michael J. Sainato
State Dept. Condemns Attacks on Russian Peaceful Protests, Ignores Those in America
Ted Rall
Five Things the Democrats Could Do to Save Their Party (But Probably Won’t)
Linn Washington Jr.
Judge Neil Gorsuch’s Hiring Practices: Privilege or Prejudice?
Philippe Marlière
Benoît Hamon, the Socialist Presidential Hopeful, is Good News for the French Left
Norman Pollack
Political Cannibalism: Eating America’s Vitals
Bruce Mastron
Obamacare? Trumpcare? Why Not Cubacare?
David Macaray
Hollywood Screen and TV Writers Call for Strike Vote
Christian Sorensen
We’ve Let Capitalism Kill the Planet
Rodolfo Acuna
What We Don’t Want to Know
Binoy Kampmark
The Futility of the Electronics Ban
Andrew Moss
Why ICE Raids Imperil Us All
March 27, 2017
Robert Hunziker
A Record-Setting Climate Going Bonkers
Frank Stricker
Why $15 an Hour Should be the Absolute Minimum Minimum Wage
Melvin Goodman
The Disappearance of Bipartisanship on the Intelligence Committees
Patrick Cockburn
ISIS’s Losses in Syria and Iraq Will Make It Difficult to Recruit
Russell Mokhiber
Single-Payer Bernie Morphs Into Public Option Dean
Gregory Barrett
Can Democracy Save Us?
Dave Lindorff
Budget Goes Military
John Heid
Disappeared on the Border: “Chase and Scatter” — to Death
Mark Weisbrot
The Troubling Financial Activities of an Ecuadorian Presidential Candidate
Robert Fisk
As ISIS’s Caliphate Shrinks, Syrian Anger Grows
Michael J. Sainato
Democratic Party Continues Shunning Popular Sanders Surrogates
Paul Bentley
Nazi Heritage: the Strange Saga of Chrystia Freeland’s Ukrainian Grandfather
Christopher Ketcham
Buddhism in the Storm
Thomas Barker
Platitudes in the Wake of London’s Terror Attack
Mike Hastie
Insane Truths: a Vietnam Vet on “Apocalypse Now, Redux”
FacebookTwitterGoogle+RedditEmail