President Obama this week reappointed Federal Reserve chairman Ben Bernanke for a second four-year term. Stockmarkets, already cheered by his weekend statement that the prospects for a return to global growth in the near-term “appear good”, jumped, with US and European indices hitting ten-month highs. The FTSE 100, up 40% since March, is enjoying its best six-month run in 50 years.
What the commentators said
The markets’ positive reaction “highlights a strange truth” about central bankers, said Lex in the Financial Times. “Everyone seems desperately to need to believe in their powers”, even though recent evidence suggests they’re just as clueless as everyone else. Nine rate cuts by the Fed in a year at the beginning of this recession hardly suggests that it was “ahead of the curve”.
After a slow start, Bernanke “proved himself a heroic fire-fighter”, warding off the threat of global debt deflation by “showering markets with liquidity”, as Ambrose Evans-Pritchard pointed out in The Daily Telegraph. This is just as well, as he “helped cause the raging fire of 2007-2009 in the first place”.
Bernanke agreed with his predecessor Alan Greenspan’s view that it was better to clean up the mess after a bubble burst than pre-empt the damage, and thought that complex derivatives were making the system safer. The latter fuelled his “excessive optimism” as the financial crisis developed. As late as October 2007 he declared that the financial system was “healthy”, said Edward Hadas on Breakingviews. Still, Obama knows that “jittery investors want continuity at the Fed” and, in any case, there are no alternative candidates who would represent much of a change.
Bernanke and other Western central banks are now “between a rock and a hard place”, as a Morgan Stanley note put it this week. Economies are still extremely fragile, weighed down by retrenching consumers and companies and damaged banking systems. But public debt levels are mushrooming. This week the White House announced that the budget deficit would be $2trn higher over the next decade than originally estimated.
If economies show signs of recovering, policy makers will have to withdraw massive fiscal and monetary stimuli to keep a lid on inflation and deficits. But if they do that too soon, “they would undermine recovery and tip the economy back” into recession, said Nouriel Roubini in the FT.
Wait too long, however, and bond investors worried about inflation will demand higher long-term interest rates, raising borrowing costs across the economy. The result would be “stagflation”. As the FT put it, Bernanke’s “travails have only just begun”.