U.S. Economy on the Mend

by John M. Curtis
(310) 204-8700

Copyright January 13, 2011
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                Showing undeniable signs of growth, Federal Reserve Chairman Ben S. Bernanke predicted the U.S. economy would grow by around 3% to 4% in 2011.  Bernanke has been under fire from conservatives for his relaxed monetary policy, leaving the Federal Funds Rate at historic lows between zero and a-quarter-percent..  Conservatives blasted Bernanke for his “quantitative easing,” buying back $600 billion of U.S. treasuries. Conservatives can’t have it both ways; insisting on tax cuts, and, at the same time, ranting against low interest rates and treasury purchases.  Bernanke’s keen knowledge of the Great Depression and the Fed’s attempts to fix the economy, enabled him to make all the right moves bailing out failing banks and injecting enough liquidity to save the nation’s financial system. Had it not been for Bernanke’s expertise and wisdom, the economy would be in the tank.

            Before former President George W. Bush signed Oct. 3, 2008 his $700 billion bailout, the U.S. banking system had run out of cash.  Since former President Bill Clinton signed Gramm-Leach-Bliley into law Nov. 12, 1999, in effect tossing out the Depression era Glass Steagall Act, bank holding companies were permitted to own brokerage businesses, giving banks the chance to capitalize on the 1990s bull market.  Massive capital gains taxes collected by the government between 1997 and 2000 left the biggest surpluses in U.S. history.  All the surpluses evaporated quickly when the tech bubble burst in the spring of 2000.  Less than 10 years later the U.S. plunged into the worst recession since the Great Depression.  Diminished tax revenues and exploding budget deficits finally caught up with the U.S. economy.  Bush handed Obama the worst economy since the Great Depression.

            Less than two years into President Barack Obama’s first term, with the deft help of Fed Chairman Bernanke, the economy is finally pulling out of its doldrums.  Republican efforts to blame the failed economy on Obama, a key strategy heading into the 2012 presidential election, has begun to backfire.  “We see the economy strengthening.  It has looked better in the last few months.  We think a 3 to 4 percent-type of growth number for 2011 seems reasonable,” said Bernanke at an event sponsored by the Federal Deposit Insurance Corporation.   More positive news on the economy has given Obama a 5% bounce in his approval ratings, now standing at 49%.  Despite the good news, Bernanke expects, as in most recessions, unemployment to lag behind. Bernanke expects the labor market to steadily improve as stock market provides more liquidity to publicly traded companies.

            To keep the economy rolling, Obama and his Treasury Secretary must continue the financial reforms started when he signed financial reform July 21, 2010.  That legislation didn’t reinstate portions of Glass Steagall that banned bank holding companies from stock market speculation.  If the Great Recession taught anything, it’s that the nation’s depository institutions can’t play the Wall Street casino without damaging the fragile financial system.  “We’re seeing an improvement in the labor market.  I think deflation risk has receded considerably.  And so we’re moving in the right direction,” said Bernanke, cautiously optimistic that the stubborn unemployment picture will show more improvement in 2011.  Bernanke’s lowered concern about deflation indicates that the Fed’s Open Market Committee could consider, given more GDP growth, raising the Federal Funds Rate.

            Only when Beranke decides to raise interest rates will markets know that the recovery is well underway.  Showing less concern about deflation indicates that consumer demand has picked up, at least enough to keep prices stable.  As the economy picks up steam, Bernanke will turn his attention to managing inflation, a growing concern after years of artificially low interest rates and his recent “quantitative easing.”  “Interest rates are higher, but I think that’s mostly because the new is better.  So I think the public has helped,” said Bernanke, explaining the recent jump in mortgage interest rates.  Expectations about an improved economy anticipate raising borrowing prices.  While the real estate market is a long way to go, more improvement in the labor market should eventually aid its recovery.  Real estate sales only improve after labor markets show substantial improvements.

            More good news about the economy only helps Barack’s approval ratings, now at 49%.  Obama hit just the right tone helping the country recover from the senseless Jan 8 killings, where a mentally disturbed gunman killed six and shot Rep. Gabrielle Giffords in a Tucson supermarket parking lot.  Giffords continues to make remarkable progress from a gunshot through her left cerebral hemisphere.  Barack’s Jan. 12 memorial speech showed his real leadership.  Nearing 50% approval ratings, 2011 promises to be a pivotal year while Barack gears up for his reelection bid.  More improvements in the economy and the expected good news from this year’s exit strategies in Iraq and Afghanistan also promises to boost the president’s popularity.  As Barack approaches his State of the Union speech to a new Republican House, he has a golden opportunity to show his bipartisanship.

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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