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Posted: August 30, 2009

Bernanke’s back

Obama makes the right call with the Fed chief's reappointment

Jeff Thredgold

President Obama made a solid choice yesterday to reappoint current Federal Reserve Chairman Ben Bernanke to a second four-year term.  His initial four-year appointment by then-President Bush expires on Jan. 31, 2010.

We noted in our Tea Leaf issue dated July 29 that reappointing Bernanke would be a wise choice.  His reappointment was also supported by roughly 90 percent of forecasting economists.  Changing horses in mid-stream is not usually a good idea, especially given the depth, slippery rocks and icy temperatures that “Captain” Bernanke is currently steering the economy through.

The President noted that Bernanke “has led the Fed through one of the worst financial crises that this nation and this world have ever faced. As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another.  But because of his background, his temperament, his courage and his creativity, that’s exactly what he has helped to achieve.”

The Fed Chairman thanked the President for his “unwavering support for a strong and independent Federal Reserve.” Bernanke pledged “to help provide a solid foundation for growth and prosperity in an environment of price stability.”

This reappointment, as well as Bernnake’s use of key terminology, was critically important because of the tough course that is yet to be followed by the Fed. At some point, the Fed will begin to withdraw much of the temporary monetary stimulus that has helped to stabilize the economy and financial markets.

These moves will be more of a two-step process than ever before. Unprecedented moves by the Fed, grouped under the banner of “quantitative easing,” have been undertaken during the past two years to help domestic and global financial markets return to some level of normalcy.

Many of these moves have had the desired effect. Other markets remain more limited in scope and volume, requiring a continued Fed participation.

More public will be the Fed’s first moves, expected by most forecasters sometime during mid-2010, to increase the federal funds rate from the record low target level of 0.00 to 0.25 percent, which has been in place since mid-December 2008.

A possible series of modest tightening moves next year could draw strong Congressional criticism as it pushes financing costs higher. The Congress would make the case that the “Fed is taking the punch bowl away from the party just when the party in getting going.”

Come to think of it, the Congress ALWAYS complains when the Fed is pushing its key interest rate higher.  Such moves could also draw criticism from the Administration, although such views would likely be expressed behind closed doors.

At this same time of rising tensions between the Fed and our illustrious elected representatives, Bernanke is very likely to be increasingly critical of the enormous budget deficits now expected. He will make it clear that deficits of roughly $1 trillion annually during the next decade are simply not affordable and would do great damage to this nation.

Touché
 

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The Tea Leaf is a weekly economic and financial update by Jeff Thredgold, economist for Vectra Bank Colorado. He has been writing an economic update every week for the past 31 years and is the only economist in the world to have received the designation of CSP, or Certified Speaking Professional. Republished with permission from the Tea Leaf by Jeff Thredgold, whose site address is www.thredgold.com/html/leaf.html.
Enjoy this article? Sign up to get ColoradoBiz Exclusives. The opinions expressed in this article are solely that of the author and do not represent ColoradoBiz magazine. Comments on articles will be removed if they include personal attacks.

Readers Respond

Congress clamoring to expand the party is de riguer. If the (privately owned) FED did not have the power to create money out of nothing, they'd have nothing to clamor about. The temptation is just too strong for mere mortals to resist. It turned Greenspan, who once said that fractional reserve banking is merely a tool of the tyrants used to extract the wealth of the populace, into a bubble-creating monster. Restore sound money. Let commodities compete with the USD by rescinding the legal tender laws. Good money will drive out the bad. The FED will wither away due to irrelevance. And we'll finally get off the boom/bust rollercoaster that is a direct consequence of fiat money. Either that, or the currency goes the Zimbabwe/Argentina/Weimar route, and inflates its way to valueless. Maybe not this depression, but perhaps the next. Invariably, it will come to pass. (My money is on sooner) By Nunya Bidnez on 2009 08 31

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