Ben Barnanke, A Has Been?

Politics aside, or not, Ben Barnanke, Chairman of the Federal Reserve, is on a campaign trail to reassure investors that his monetary policies of the past, present and future have and will continue to guide us out of the recession. His messages aren’t meant to save the economy, but to save his job when his four-year term comes up for re-selection in January.

He’s faced Congress to substantiate, or defend, his worthiness. His words have appeared on editorial pages in newspapers across the nation. He’s done TV interviews on ‘60 Minutes’ and ‘The News Hour with Jim Lehrer’.

During his confirmation hearings in 2006, Bernanke espoused his views on economic theory and policy, stressing the importance of communication and transparency. But he also said the final say on government debt and deficits lie with the President and Congress.

Having written numerous books and articles, he frequently focused on limiting inflation to no more than 2% over any given two-year period. For now, there appears little concern. As a matter of fact, many economists feel the risk of deflation is more worrisome. Deflation occurs when consumers hold off buying big-ticket items with the belief that during an economic downturn prices will continue to fall. The result is lower demand so job losses increase, employers then curtail investments because demand is low resulting in higher unemployment, foreclosures and bankruptcies.

Synopsis: no spending = no demand = no need to increase supply = fewer jobs, and so forth. The spiral ends when inflation appears.

Other economists are fearful that actions taken to fight deflation in the long term will result in runaway inflation. This would be the beast that puts the economy at risk for many years to come. A couple of indicators suggest we’re on our way. In January the 30-year fixed mortgage rate climbed from 4.96% to 5.12% within a week’s time. It stabilized in May just below 5.0% but it as of July 29 it stood at 5.56% per Bankrate’s weekly survey. This is a vast improvement from 6.77% a year ago, bringing down monthly payments by $158 on a $200,000 mortgage, but it may turn out to be short-term relief.

The Fed is printing more and more stimulus money, which means increased government borrowing, resulting in an ever-growing portion of tax dollars being paid toward interest. This could mean more printing of money and an increase in debt. Another stimulus package would exacerbate the situation.

Since Sept. 2007 the Fed interest rate has been cut nine times from 5.25% to near zero in Dec 2008, significantly adding to the prospects of deflation. There’s nowhere to go but up, which will certainly bring down the stock market.

To worsen matters, this past week China, which holds an estimated $1.5 trillion in Treasury securities, sought a guarantee that the U.S. will cut its debt. Timothy Geithner gave his assurance that, as economic recovery strengthens, debt reduction will follow. As consumer confidence continues to wane, the prospects are anything but positive.

Alan Greenspan, whose actions are said to have been a large contributor to the current recession, admitted he “made a mistake” in opposing regulation of derivatives and acknowledged that financial institutions didn't protect shareholder investments as had been expected. He said that he and other economists are in “a state of shocked disbelief”… “that regulation in the banking industry led to meltdown of U.S. credit markets”.

Greenspan was supportive of sub-prime lending practices that led to the housing bubble. He was also at the helm of the Fed when the dot-com bubble burst.

And yet he says the Fed was blameless for the housing bubble that began in 2006. It’s a little hard to accept since he was Chairman for 18 years, going back to his appointment in 1988 by President Reagan up until the appointment of Bernanke in 2006, at which time the President Bush said, “Ben Bernanke is the right man to build on the record Alan Greenspan has established." This should have rung a few bells that the economy would continue to sputter, falter and come to a near standstill.

Where does that leave Bernanke? With President Obama’s tendency to recycle past Democrat influences, odds are that he’ll appoint Director of the National Economic Council Larry Summers. This is the same guy that, as Treasury Secretary during the Clinton administration, had supported the 1999 Gramm-Leach-Bliley Act. This bill repealed the 1933 Glass-Steagal Act, which had taken actions to correct the conflicts of interest and fraud in banking institutions that had allowed them to own other financial companies. See where we are now? There’s plenty of blame from every which way you choose.

There’s an excellent possibility that Barnanke’s campaign scheme to keep his job as Fed Chairman will be for naught. Ben may become a has-been.