Bernanke’s positive message

Whether it is a gamble or a gambit, the US Federal Reserve announcement Thursday that it is leashing its mammoth powers to get the American economy moving faster is a dramatically significant move coming from Ben Bernanke of all people and in an election year. Moreover, whatever happens in the United States in terms of politics and economy will have its ramifications all over the world. After all this is a superpower, may be in decline, but still wields a lot of power politically and economically worldwide.
The Fed is usually concerned with two main issues — unemployment and inflation. Since inflation has been kept at bay in low level for the past two years, the focus now turns to unemployment. By deciding to buy mortgage securities at a rate of $ 80 billion a month up to the end of the year and then half of that amount starting come January and till the market “improves substantially,” Bernanke is in effect putting an open-ended, ever-green commitment to revive the economy. Add to that the other commitment of keeping interest rates at their low level up to 2015.
The important thing about these decisions is that they send a strong message that the Fed is going to use its huge power to get the economy moving through urging people to spend and spend now, instead of waiting for things to improve in a year or two. The reaction was swift as both the Dow Jones Industrial Average and Standards and Poor’s 500 showed a clear positive response rallying up on hearing the news and to levels not seen since 2007.
Unlike other branches of the government, the Fed chairman has huge powers as he does not need permission from any institution to make such decisions that involves billions of tax payers’ money. And that is why these decisions seem unprecedented since the Fed usually adopts a cautious approach and unlike his predecessors Alan Greenspan and Paul Volcker, Bernanke has been showing more caution and restraint.
However, having such drastic measures announced in an election year, make them by default part of the election campaign. George Bush Sr. for instance blamed part of his loss of his bid to be reelected for a second term on Greenspan, who refused adamantly to ease the interest rates and that the creeping economic recovery did not show up clearly to voters, who opted to side with Bill Clinton, who coined the famous motto: “It’s economy stupid,” not foreign policy, where Bush could have an upper hand.
The Fed’s decision helps President Barack Obama’s message that economically speaking things are not great, but are going in the right direction and that is why he needs to be reelected to spend an additional four years to complete the job he started to address the damage created by his predecessor. Initial reactions from the Republicans’ camp are not all that welcoming and even there were some reports quoting Mitt Romney as threatening to fire Bernanke if elected president.
However, the same day the Fed came with this announcement, official figures released showed that in the previous month of August the US budget deficit rose by $ 191 billion to top $ 1 trillion for the fourth straight year, or $ 1.16 trillion to be exact. That is a chronic structural problem that needs political decisions.
What Bernanke did was to buy politicians some time. But politicians after all are politicians who look at their own personal interest before anything else. When the country gets used to the habit of spending beyond its means and resort to borrowing to fund that spending, there is definitely something wrong that needs to be addressed and in a radical way.
But that is not expected to happen under the current political system that is moving toward becoming more and more dysfunctional. The country is paralyzed almost completely every two years waiting for some kind of election results be it presidential or half of the congress. In addition to the growing tendency not to cross lines to conclude needed deals on issues like shutting down the federal offices because of the lack of agreements between the two isles in the congress or between the congress and the president. That is why it is becoming difficult and more difficult to adopt a long-term strategy to tackle any issue. Long-term plans usually require short-term sacrifices that no politician is willing to take and jeopardize his or her future. But the worries of the American economy are worries for the rest of the world given the sheer size of that economy and its huge impact on others, and that is why the rest of the world is watching, talking and keeping its fingers crossed hoping that something rational will take place in Washington DC. For the time being Bernanke is sending a positive signal.