The U.S. economy is his kryptonite. Al Lewis of MarketWatch offers a satirical comparison of Federal Reserve chairman Ben Bernanke to the “Man of Steel”. Both Lewis and my comment could be described as cheap shots to him. However, being fair to Bernanke, his tools are limited in turning around the economy and unemployment.
Still, if it was up to me to grade Bernanke’s performance, it would rate from a C- to C. His best work was preventing a huge collapse of our financial system in 2008. Even though some of his actions might have been questionable, many people do not realize how close the U.S. was to experiencing a depression. Through creative monetary policy, he was able to create liquidity within the financial system without spurring significant inflation and for that he deserves credit.
While Bernanke’s critics have predicted that his aggressive monetary policy would result in high inflation, it has been four years now and inflation remains moderate.
Having said that, we cannot say that his efforts have not caused any negative consequences. Some of the global instability, such as high food prices in the Middle East, Africa, and other developing nations, can be attributed to the U.S. and their efforts to keeping the value of the dollar low in order to kick-start the economy. With U.S. dollars serving as the primary financial vehicle in the global economy, a cheaper dollar made credit more accessible not only in the U.S., but throughout the world.
On the surface, that sounds good. When developing countries are able to access more credit, then that will lead to more investment and consumer spending. However, the downside is that it can lead to over-investment and cause asset bubbles. It is similar to U.S. households, who cannot resist low interest rate offers, and get into trouble by increasing their debt levels. Even though it will enhance their standard of living in the short-run, it can result in devastating outcomes when economic conditions change.
We have seen potential asset bubbles start to emerge in China, India, Brazil and other emerging countries. With this occurring, inflation has started to rise in all of those countries and there is concern that their economy will suffer severely as a result. Even though that has not happened yet, its threat remains and the U.S. should bear some of that blame.
Referring back to U.S. performance, it is true that the U.S. has grown steadily since its collapse during the end of the Bush administration when our economy contracted by a staggering rate of -8.9% during the 4th quarter of 2008. Since that time, we have shown steady improvement, but it has been very slow. Subsequently, our economy would shrink further the next two quarters, but at a much slower rate. But since then, our economy has grown consistently, albeit modestly. Historically, we want to see economic growth of at least 3%. In over four years, we have only exceeded that benchmark three times out of seventeen quarters.
When looking at unemployment, the figures are even worse. Historically, an economy is performing at capacity when the unemployment rate is between 5-6%. The last time that the unemployment rate fell below the 6% mark was July 2008. While we should be encouraged by the drop in the unemployment rate from 10% in October 2010 to its current rate of 7.6%, that is still a very high number. Another disturbing measure is long-term unemployment, which continues to be a problem. Pew Fiscal Studies showed that 9.5% of the unemployed were searching for work for at least a year in the first quarter of 2008 and that has jumped up dramatically to 29.5% in the first quarter of 2012. These high rates have never been close to being matched in past history.
The economic evidence is clear. Bernanke is no Superman.