Not holding back the tide

US President Obama has re-appointed Bob Bernanke as chairman of the US central bank the Federal Reserve for a second four-year term. You can see why.

Bernanke is an expert on the Great Depression, and has sophisticated views about what he sees as policy errors that brought it about following a catastrophic financial crisis. Sounds familiar?

Bernanke is justly famous for the ideas on monetary policy he adopted from Milton Friedman – Margaret Thatcher’s economic mentor. These ideas were a big factor in the introduction of quantitative easing designed to increase the flow of credit (and debt) once interest rates had fallen to zero. “QE”, as it’s become known, is credited with a slight slowdown in the rate of economic deterioration.

It was back in 2002 that Bernanke referred to the use of the ‘helicopter drop’ of paper money directly into the hands of the population, bypassing the banks as a way of restoring demand. Astonishingly, that policy was used for real during the invasion of Iraq.

The effect of his policies can be seen in the White House’s latest estimate of its budget deficit: $2,000bn – that’s $2 trillion - higher over the next 10 years than it had predicted as recently as March.

As the recession drives US unemployment beyond 10%, those losing their homes through foreclosure have spread from the sub-prime mortgage holders in the poorer areas to the middle classes, and the numbers are increasing. Government income from tax is being hit hard, and the cost of the limited benefits that the US states do provide – food stamps and short-term payments to the newly unemployed - is accelerating.

And, despite optimistic predictions about a recovery, the White House’s near-term revised expectation is for the US economy to shrink by 2.8% this year – far worse than its previous estimate of a 1.2% decline.

It’s not just the White House that got it so wrong. The Congressional Budget Office released sharply higher deficit projections predicting the 10-year deficit would reach $7,140bn, some $2,700bn more than it had thought in March. The newly published figures on the rising tide of debt don’t even include the effect of Obama’s latest plans. Bill Gale, a senior economist at the respected Brookings Institution says taking these into account implies a ‘deeply alarming’ deficit increase way in excess of $10 trillion over the next decade.

The only conclusion to be drawn from the latest US figures is that the economy is way beyond the control of Bob Bernanke. Four decades of globalisation have ensured that the financial and economic juggernaut can not be guided, let alone controlled by the pilot of even the world’s most powerful economy.

As the global capitalist crisis deepens, it exposes the absurd optimism – indeed, the helplessness - of those supposedly in charge of putting things right. Indeed, the pink pages of the financial world’s most prestigious daily, The Financial Times, are sprinkled with perplexed mutterings. On the back of this week’s “Fund Management” review, for example, is the headline: “Time to ditch all economic models”. Writer Vince Heaney argues that the “efficient markets hypthothesis”, - the EMH, has a “lack of relevance to how financial markets actually work”. In other words, the Friedman-Thatcherite-New Labour dogma that market forces must be allowed to prevail has been exposed as a formula for disaster. Heaney goes on to warn of coming “extreme events” in the financial markets.

Bernanke’s middle name is ‘Shalom’. It means peace, but don’t expect it anytime soon.

Gerry Gold
Economics Editor