Four More Years for Ben Bernanke; What Will He Do?

Ben Bernanke was confirmed by the U.S. Senate today for a second four-year term as chairman of the Federal Reserve. He was supported by 70 senators, which sounds like a lot but is actually the lowest support a Fed chairman has ever received.

His reactions to the financial crisis have been lauded and lamented; he has been criticized for being too slow, too fast, too interventionist, too power-hungry -- and all of that likely contributed to his relative unpopularity in the Senate chamber. At the same time, he is Fed chair at a time of economic troubles unmatched since the Great Depression, which just happens to be an era on which he is a scholar.

David Wessel, economics editor for The Wall Street Journal and author of In Fed We Trust: Ben Bernanke's War on the Great Panic (and perhaps the only person to compare speaking to The Commonwealth Club with Judge Judy), addressed The Commonwealth Club in September 2009 on the topic of "Ben Bernanke vs. the Great Panic." Watch the video above of that presentation to see what insight Wessel offers into Bernanke's decision-making, and what that tells us about how the Fed chief is likely to steer the economy in his second term.

Helicopter Ben: Printing Money

"Helicopter Ben is still throwing money out there," said conservative businessman and Forbes editor Steve Forbes in his August 7, 2008, speech to The Commonwealth Club.

Forbes was referring to Ben Bernanke, the chairman of the Federal Reserve and one of the two key figures in the government's response to the credit crisis and the please-don't-call-it-a-depression recession (the other figure is the Treasury secretary). Forbes (see video below) also said, "Ben Bernanke once wrote academic papers saying the way you deal with a crisis is you print more money, throw money at it. He even made the analogy that Milton Friedman did to throwing money out of helicopters, which is why his name inside the Fed is Helicopter Ben."

Forbes was speaking back in August, when the full extent of our economic troubles was not yet known. Now comes news that Bernanke announced plans for increasing Fed Treasury purchases and mortgage-backed-securities purchases to the tune of more than $1.2 trillion. The Fed basically makes its own money, so it's printing the money and pumping it into the economy to try to unfreeze credit markets and improve the health of the financial system (which Bernanke told "60 Minutes" this past Sunday was key to recovery this year).


Forbes isn't the only person who raises an eyebrow at efforts to vastly increase the money supply. The same concern is behind the growing criticisms from the governments of Germany (a country that has strong memories of the disaster wrought by runaway inflation during the Weimar Republic) and France.

Put simply, the fear is that printing lots of money right now might bring an earlier end to the recession, but it will be nearly impossible to shrink the supply at just the right amount at just the right time at just the right speed during the recovery to prevent runaway inflation.

Is it a case of the lesser of two evils? Can Bernanke -- an expert on the Great Depression -- successfully manage the transition to recovery? Will the $1.2 trillion be enough to make a difference? Leave a comment and join the discussion.

Obama Adviser: Fundamentals of Economy are Sound

Christina Romer, one of President Obama's top economic advisers, echoed one of Sen. John McCain's most derided campaign quotes when she told David Gregory on yesterday's "Meet the Press," "The fundamentals [of the American economy] are sound in the sense that the American workers are sound, we have a good capital stock, we have good technology," she said. "We know that -- that temporarily we're in ... a bad situation."

California residents can get a fuller sense of her interpretation of the health of our economy and how it will be affected by continuing government actions when Romer appears at The Commonwealth Club of California in -- we hope -- the near future. She had been scheduled to appear at The Club tonight, but she had to postpone the speech when government business came up. (Keep watching The Club's web site for a new date when it is scheduled.)

The administration looked to be using the Sunday morning and evening public affairs circuit to paint the picture of an ailing economy beginning to stir. In addition to the president's comments earlier in the week and Romer's assessment yesterday, Federal Reserve Chairman Ben Bernanke told "60 Minutes" the recession would "probably" end this year. (View the video here.)

A story on Fox News makes note of the similar language used yesterday with that of McCain's uttered just days before the fall of Bear Stearns last September. It quotes White House Press Secretary Robert Gibbs making a hard-to-understand argument in the administration's defense, "there's a definitional difference between sound and strong."

When Romer comes to the Bay Area, maybe they'll have the definitions figured out.

Administration: Nationalization of Banks is not Happening

The Citibank web site has its famous marketing slogan atop its home page, "Citi never sleeps." The motto means customer's can do their banking anytime, but with nationalization of banks becoming more likely by the day, it could be an admission of many sleepless night to come.

The past week has seen more than a whisper campaign from some Democrats and few leading economists that the short-term remedy for the banking system is nationalization. Sen. Chris Dodd has said it may "unavoidable", which is nearly equivalent to saying, "Folks, get ready. It's happening." It's no wonder the stock market is beginning to reflect concern about what a collapse of Citibank, Bank of America or Wells Fargo could mean to the economy, and the Obama administration may be slowly setting the stage for nationalization. For the time being, though, President Obama and Fed Chairman Ben Bernanke say nationalization is not on the radar. Bernanke's comments stoked Wall Street, and that may have been his intent, while Treasury Secretary Timothy Geithner told Jim Lehrer, “I think that’s the wrong strategy for the country and I don’t think it’s the necessary strategy.”

The Washington Post reported that the Obama administration tweaked the terms of government assistance by demanding common stock in lieu of cash. "The change paves a road toward nationalization for the most troubled large banks," according to the Post. A piece on Bloomberg.com goes further in calling nationalization inevitable.

Nationalizing the nation's top banks has its critics, of course. With taxpayers already shouldering a large burden of risk that is likely to increase in the future, backing the financial sector may be too much. Some economists even believe another stimulus bill of nearly the same sticker price will be needed within two years. 

James S. Turley, Chairman and CEO of Ernst & Young told The Commonwealth Club of California earlier this month that state ownership is a bad idea over the long haul:

The thing I hope doesn't happen is government officials get too comfortable with state ownership in the various industries they are investing in. And I hope they don't see this as the long-term solution.... Let me be clear, I think it was important that the government stepped in during these unprecedented times, but it is not a good idea and no thinks that governments over the long-term allocated capital as efficiently or effectively as free markets.

On the other hand, many commentators say that taxpayers saw little in return in the form of consumer lending after the initial $350 billion bailout money passed late last year, and news reports of lavish executive spending and multi-million dollar bonuses left a lingering distrust toward the banks.

How poor is the health of the nation's biggest financial institutions? The grand sage of the credit mess, New York University Professor Nouriel Roubini laid it out in this week's issue of Time, saying Citibank is "on the way to ICU," Bank of America should "prepare the transfusion" and surprisingly, Wells Fargo needs a "Defibrillator. Stat!"

Just 16 months ago, Bank of America and Citigroup were quarterly flipping top positions for the title of world's largest bank. Today, they may be on the verge of being owned by the biggest economy in the world.

Reich Sees Opportunity in the State of Nation's Economy

Former Secretary of Labor Robert Reich foresees the loss of another 3 million jobs and the Dow Jones “languishing” around 7,500 during the next year.

Reich cautioned members at The Commononwealth Club of California’s Bank of America-Walter E. Hoadley Annual Economic Forecast today in San Francisco that without “effective government action” the current recession will likely continue until 2010, with unemployment rising over 10 percent.

He reiterated his belief that the much-debated stimulus bill on Capitol Hill should carry a price tag of $900 billion over the next two years, which is larger than the plan put forth by President-elect Barack Obama. Reich believes the lower figures put forth by Obama may be an attempt to lure Republican support for the plan.

Reich praised Federal Reserve Chairman Ben Bernanke for taking on more responsibility during the financial decline, while deriding Treasury Secretary Hank Paulson’s Troubled Assets Recovery Program as “a miserable failure.”

Despite the ecomonic gloom, Reich attempted to cajole some hope in the current situation by noting out-of-work Amrericans and a neglected infrastructure could spark a type of national renewal.

“We have now the opportunity to make these investments or, at least, make a down payment on these investments,” said Reich, “We have the opportunity because of the gap between economic capacity and demand in the private sector from consumers and business.”

Reich also said that, because of the popularity and relative safety of Treasury bills, borrowing is cheaper than ever before. In addition, there's a mood among Americans of striving for a common political cause. “We have an opportunity to begin doing what we could not before.”

The bursting of the housing bubble, according to Reich, was not the impetus for the current state of the nation’s coffers, but ultimately revealed the underlining problems with our economy.

Reich has always laid claim to defending working class Americans and finds their plight to be indicative of the current financial situation, where consumers turned to refinancing their homes and procuring home equity loans as a way to finance their lifestyles despite stagnating wages in inflation-adjusted terms.

“Some Congressmen said Americans are living way beyond their means, but another way of looking at that was: Americans' means have not grown, and therefore the only way of continuing their spending and maintaining their living standards is to go deeper and deeper in debt,” said Reich, “When the housing bubble burst, so did that last coping mechanism.”

The ways Americans coped with maintaining their financial standing, Reich said, goes back to the 1970s when more women were forced into the labor market not because of opportunity but for maintaining their family income. Americans also worked more hours disportionate to others in the world. Reich, at one point, offered the acronym, “DINS” to describe the situation as “Double Income, No Sex.”

At various point during the program, Reich comically played on the audience’s dour deameanor by urging them to keep in mind that “now is an opportunity that we have not had in decades.”

--By Steven Tavares

Is Reich correct in his diagnosis of the economy and what needs to be done? What do you think will happen to the economy in 2009? Post a comment and share your opinion.