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Bernanke's opportunity to step out of Greenspan's shadow

By Peter Morici
web posted June 26, 2006

Ben BernankeBen Bernanke is in a tough spot. The U.S. economy is slowing, inflation is up, and he can easily make things worse.

The predicament owes much to President Bush and Alan Greenspan, but Bernanke's words and ideas are contributing to the emerging morass.

Since President Bush took office, GDP has risen 2.7 percent annually. Hardly a breakneck pace, the policies that accomplished this growth promise poorly for the future.

Since 2000, tax cuts, government spending and consumer borrowing have powered growth. Business investments in new products, methods and machines have accounted for only 6 percent of GDP growth. This is well below the 11 percent historical average and raises serious doubts about future innovation and improvements in worker productivity.

Meanwhile President Bush merrily mortgages our children. The federal budget has swung from an $86 billion surplus to a $500 billion plus deficit.

An overvalued dollar, instigated by Chinese currency market intervention and U.S. inaction, has doubled the trade deficit. The cumulative deficits of the last five years have been financed by issuing foreigners $4.5 trillion in Treasury securities, corporate bonds and other IOUs. The total owed foreigners will exceed $6 trillion by the end of 2006, and require interest payments of about $300 billion a year.

All that foreign money keeps credit plentiful and props up consumer debt; however, the overvalued dollar has made imports artificially inexpensive against American products, and compelled many U.S. businesses to close or move operations to China and other Asian locations. U.S companies are buying back common stock at a record pace, because they lack good investment opportunities in the United States.

Meanwhile, Alan Greenspan has helped the Administration brand as protectionist anyone who suggests the United States meaningfully inspire China to revalue its currency and play by free trade rules.

Now the Bush growth strategy is wearing thin. Mounting credit burdens and rising gasoline prices are breaking consumer spending and growth. Interest rate fears are raking the stock market as investors increasingly doubt the competency of economic leadership.

Rocketing energy prices and accompanying inflation should surprise no one.

The president, bowing to Ford and GM, is unwilling to champion a meaningful strategy to conserve gasoline. The Congress, genuflecting to environmentalists, has been unwilling to clear a path for a new petroleum refinery in more than a generation. Every time the overvalued dollar sends another autoparts or appliance factory to China, global petroleum consumption goes up, because China uses energy so much less efficiently than the United States. When gasoline hits four dollars a gallon, those low priced imports at Wal-Mart may not seem like such a bargain.

Scissored by slowing growth and petroleum-driven inflation, Mr. Bernanke first announced the Fed might pause in raising interest rates, then he retracted, and then he panicked markets by signaling he will raise interest rates as much as necessary to stem inflation.

In Washington, when you are uncertain about where you are going, it's best to say little. When the policy you have isn't working, it's best to look for better solutions.

The United States accounts for only about one-quarter of the oil consumed globally, and slowing the U.S. economy a few percentage points will have little effect on gasoline prices. Hence, raising interest rates will not much affect oil prices or inflation but increases the risks of recession and stagflation.

Only recently did Bernanke speak about oil prices in a way that caused notice, even though economists advising businesses have been talking about it for months.

Instead of leading the thinking, Bernanke is following it, and the press is beginning to ask if he behaving too much the academic. Sadly, that may be the case but he still has time to adjust.

As Fed Chairman, Bernanke has tools other than interest rates. He has a pulpit to lay bare the problems created by federal deficits, a vacant U.S. energy policy and Chinese manipulation of the value of the dollar.

Instead of running interference for President Bush, as Greenspan did, Bernanke should remember one solitary fact. The Congress created a politically independent Federal Reserve for a purpose.

Serving that responsibility, he can step out of the shadow cast by Greenspan by giving us clarity of thought and honesty in articulating how the nation can address the challenges it faces.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission. He serves on the Bloomberg and Reuters macroeconomic forecasting panels.


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