Fed's Bernanke Pulls All the Right Strings

by John M. Curtis
(310) 204-8700

Copyright November 8, 2010
All Rights Reserved.                                

           Federal Reserve Board Chairman Ben S. Bernanke knows he’s doing the right thing when China, Russia and a host of foreign governments rant about the Fed’s recent “quantitative easing,” purchasing up to $600 billion of long-term treasury bonds.  China loves play the pot calling the kettle black when it comes to currency manipulation, refusing, despite pressure from the world’s biggest economies, to float the yuan.  China wants to keep its currency undervalued to continue its cheap labor markets for the world’s richest companies.  Meeting in Seoul, South Korea for the G20 conference, China’s vice finance minister Zhu Guangyao blasted the Fed for creating new waves of “cash-sloshing,” deliberately weakening the dollar to make U.S. exports more attractive in world markets.  China, which currently holds nearly $1 trillion in U.S. treasuries, worries about devaluation.

            Zhu has nothing but disdain for Bernanke’s recent move that counters China’s refusal to allow currency markets to price the yuan.  China worries that manufacturers would shift production to other developing countries.  Fed’s decision “does not recognize, as a country that issues one of the world’s major reserve currencies, its obligation to stabilize capital markets,” said Zhu, blasting the Fed for its move to devalue the U.S. dollar.  China stands to lose billions in its current treasury holding by Beranke’s “quantitative easing,” despite refusing to let its currency float.  Zhu knows that Bernanke’s major concern is stimulating the sluggish U.S. economy, not whether or not foreign treasury investors lose money.  While there’s good reason to keep the U.S. dollar as the world’s reserve currency, Bernanke must still do what’s necessary to stimulate the U.S. economy.

            Bernanke, who inherited his job Feb. 1, 2006 from “the maestro” former Fed Chairman Alan Greenspan, was confirmed January 28, 2010 by the Senate for a second term.  While all Fed chairmen have their critics, Bernanke has shown the kind of wisdom and mature leadership during a time of great economic upheaval.  His approach at “quantitative easing” is a brilliant strategy to re-supply liquidity to the nation’s biggest financial institutions, driving consumer interest rates lower.  “Nor does it take into consideration the impact of excessive fluidity on financial markets of emerging countries,” said Zhu, criticizing the Fed’s attempt at increasing “liquidity,” not “fluidity.”  Zhu believes the Chinese are the only country with the right to control its currency, monopolizing its manufacturing supremacy.  China refuses to allow its currency to float on world exchanges.

            Chinese and Russian officials talk about the devaluation of the dollar against foreign currency hurting global financial markets.  They don’t acknowledge the damage done to world markets, including China, by the U.S. economic slowdown.  Without a robust consumer economy, demands for cheap imports drop.  Today’s consumer economy is stuck in neutral because of high unemployment and slowed consumer demand.  Foreign competitors, from Brazil to Canada, dislike Bernanke’s moves because it devalues the U.S. dollar.  When the dollar devalues against foreign currencies, it hurts foreign exports.  Bernanke knows, while wanting to be a good neighbor to foreign competitors, that the U.S. must do what’s right for its own economic and foreign policy.  No one at the G20 lectured the Frankfurt-based European Central Bank about printing more euros to bailout failing Eurozone economies.

            EU central bankers love the lecture the U.S. Fed about its aggressive moves to prevent a major global economic meltdown.  Printing more cash in the U.S. has only marginal effects on world economies.  U.S. export business lags far beyond Germany and Japan, hardly jeopardized from Bernanke’s current “quantitative easing.”  Bernanke knows he’s running out of rabbits to pull out of his hat, since he dropped the Federal Funds Rate to zero-to-a-quarter-percent.  His only way left to stimulate the economy without further bailouts is to buy up U.S. treasuries, driving down short-term interest rates.   Since two-thirds of U.S. Gross Domestic Product built on consumer spending, Bernanke knows there’s no lasting economic recovery without generating more private sector jobs.

            Bernanke showed his mettle resisting whining by foreign governments about his attempts to stimulate the U.S. economy.  Before China and other foreigners criticize the Fed’s attempts to save the U.S. economy, they should only pray his efforts pay off, generating more consumer demand.  If the Fed can’t create more consumer demand at home, U.S. manufacturers aren’t going to generate business in Asia’s cheap labor markets.  While Zhu can be as “candid” as he wants, he should look at how China continues to manipulate the yuan.  “So we feel that under these circumstances, this second round of quantitative easing is a shock to the stability of global financial markets,” said Zhu, exaggerating the Fed’s actions on foreign exports.  Zhu and other finance ministers know that Bernanke won’t be deterred from doing what’s needed to fix the U.S. economy.

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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