by John M. Curtis
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Copyright July 21, 2009
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         Federal Reserve Board Chairman Ben S. Bernanke faces a no-win situation, vilified on both sides of the aisle for a near impossible balancing act:  Keeping the economy from tanking and, at the same time, placating concerns from both political parties.  Predicting an end to the current recession by year’s end, Bernanke went out on a limb, placing his credibility on the line.  While President Barack Obama supports expanding the Fed’s oversight capacities, some critics already complain about Bernanke’s virtually unchecked powers, granting trillions to unknown financial institutions.  Between the Fed and U.S. Treasury, nearly $13 trillion has been spent, $10 trillion remains unaccounted for.  “You can find out more about the operations of the CIA than the Fed.  The Public has a right to know,” said Rep. Bill Posey (R-Fla.), questioning the Fed’s secrecy.

            Managing the worst economy since the Great Depression, Bernanke has taken extraordinary steps to prevent economic collapse.  As a student of the Great Depression, no one knows better than Bernanake what caused what former Fed Chairman Alan Greenspan called “a once in a century event.”  Bernanke knows that risky derivative trading by the nation’s biggest financial institutions caused the cash crunch and liquidity crisis threatening the nation’s banking system.  When the Gramm-Leach-Biley Act passed in 1999 under former President Bill Clinton, it paved the way for the latest banking meltdown, permitting depository institutions to engage in risky stock market investing.  From 1933 to 1999, bank holding companies were banned under the Depression era Glass-Steagall Act from stock market speculation .  Gramm-Leach-Biley assured that history would repeat itself.

            Everyone wants to know the proverbial question:  When the current economic downturn will end.  Bernanke’s announcement July 21 that he intends to leave the Federal Funds Rate unchanged at 0-.25% signals in the most obvious way that there’s no end in sight to the current recession.  Despite reports from the White House Council of Economic Advisors, leaving interest rates unchanged indicates Bernanke sees unending economic weakness.  “The Fed has made some big mistakes,” said Rep. Spencer Bachus (R-Ala.), ranking member on the House Financial Services Committee.  “Letting the Fed become a financial supercop would be just inviting a false sense of security,” not trusting Obama’s plan to expand the Fed’s oversight powers.  Where was the Fed or the Securities and Exchange Commission when convicted felon Bernard Madoff fleeced investors for over $65 billion?

            No one knows whether Barack will reappoint Bernanke when his term expires next year.  Much depends on whether the economy recovers before next year’s midterm elections.  Obama approval ratings have been declining under the weight of a stubborn recession, where some 3 million were added to the unemployed, now approaching 10%.  If unemployment continues to rise into next year, it’s unlikely that Bernanke will get invited back.  Six months after Congress approved Barack’s $789 billion bailout plan, unemployment continues to ravage an already shaky jobs’ market.  Rep. Ron Paul (R-Texas) warned against extending more power to the Fed, blaming the Fed for playing politics.  “A perceived lack loss of monetary policy independence could raise fears about future inflation,” said Paul, suggesting the Fed’s actions were based on shoring up Democratic support.

            Beranke reassured investors that the Fed was ever-mindful of inflation, adjusting monetary policy accordingly.  His decision to hold rates steady reflects his pessimistic outlook about growth heading into 2010.  Bernanke’s crystal ball hints at stagnant or retarded growth into the foreseeable future. Bernanke’s critics believe his policies have weakened the U.S. dollar by diluting the currency through heavy borrowing.  Since Obama took office, the national debt has increased by over $10 trillion, adding to concerns about renewed inflation.  With rising unemployment, Bernanke doesn’t yet see a time when consumers will, once again, return to the marketplace with avengence.  Weak consumer spending could keep the economy in the doldrums for the indefinite future.  Until consumers see the Fed raising interest rates, they can expect weak growth and a fragile economy.

             Bernanke’s monetary policy reveals that the Fed sees no real end to stagnant growth and the stubborn recession.  Pumping untold trillions into the economy hasn’t yet monetized into inflation, also a reliable barometer of sluggish growth.  “Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending,” said Bernanke, warning that anemic economic growth continues to hurt Gross Domestic Product.  If the Fed’s massive economic stimulus plan fails to promote growth and reduce unemployment, it’s going to weigh against Obama reappointing Bernanke for a second term.  Critics, like Sen. Minority Leader Mitch McConnell (R-Kt.), argue that Bernanke’s actions buried the economy with massive debt, hurting long-term growth.  If that’s true in 2012, Obama will have to do some pretty fancy footwork to convince voters for a second term.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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