EconomicCrisis.US

Reporting from Washington – Federal Reserve Chairman Ben S. Bernanke has been praised by President Obama and hailed by most mainstream economists for bold policies that played a critical role in pulling the U.S. economy back from the brink of disaster.

The Fed chief even won a celebrity accolade Wednesday when Time magazine named him Person of the Year.

But instead of basking in glory, the 56-year-old professorial Fed chairman is fighting for his job — and for the survival of policies at the heart of efforts by the central bank and the Obama administration to keep the nation’s fragile recovery on track.
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History tells us that it is the exit strategy from a crisis that paves the way to the next one. The most recent instance has been the US exit strategy from the double shock of the dot.com bubble and the Twin Towers attack.

At present we already know where the fuel of the next big fire is: public debt in the more advanced countries. This is all the more obvious since the ongoing massive swap from (almost) worthless private debt to (almost) guaranteed public debt will be the lasting bequest of the current crisis. Latest forecasts say that the average debt/GDP ratio of OECD countries will soar from less than 70% to more than 100% in the next few years. For some of these countries this ratio is already climbing fast and will probably reach unprecedented heights, unless fiscal stabilization interventions are taken rapidly regardless of the state of the real economy.
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Over the weekend, President Barack Obama went on the offensive against Wall Street for not lending more to Main Street. On CBS’s “60 Minutes,” the president declared, “I did not run for office to be helping out a bunch of fat cat bankers on Wall Street.” He was joined on the Sunday morning circuit by his chief economic adviser, Lawrence Summers, who echoed the message of intimidation.

Wall Street fat cats are always a convenient political target, but bankers are responding to the incentives generated by the economic policies of the Treasury and the Federal Reserve. First and foremost is the Fed’s policy of near-zero interest rates.
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Federal Reserve officials declared financial markets healthy enough to remove most emergency aid without going as far on their support for the U.S. economy.

The Fed, after concluding a two-day meeting yesterday, said most of its lending programs would expire as scheduled Feb. 1 because of “improvements in the functioning of financial markets.” Policy makers said the labor market is stabilizing yet kept a pledge to keep interest rates “exceptionally low” for an “extended period.”

The statement reinforced economists’ forecasts that the Fed will wait from six months to a year before raising borrowing costs. By confirming plans to end its aid to bond dealers, short-term debt markets and money-market mutual funds, the Fed signaled it sees a waning in the “unusual and exigent” conditions that prompted creation of the programs in 2008.
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