And the 2011 Man of the Year Is...

Chairman of the Fed Ben Bernanke
Photo Courtesy of the Fed Reserve

There are a number of big stories this year: the largest majority GOP House in decades,  in particular influenced by the Tea Party rebellion to an out-of-touch progressive President and Congress, and its titanic struggle with Senate Democrats and President, working hard to consolidate and make permanent their superspending ways in the 111th Congress; there was the contrived counter-revolutionary Occupy Wall Street, a motley crew of dissidents trying to scapegoat the upper 1% based on flawed economics; there were the epic state budget battles, particularly in Wisconsin, Ohio, Illinois, New York and California, with Gov. Scott Walker (R-WI)'s  public sector reforms opposed by privileged public sector unions; there was a tumultuous year in foreign policy, especially in dealing with the "Arab spring" Middle East, with Obama aggressively expanding the scope of drones and intervening in Libya and elsewhere; there was the volatile, most wide open GOP Presidential race in decades.

Within this context, I considered Mohamed Bouazizi, the Tunisian whose death sparked a cascading set of popular revolts across the Arab world, notably Egypt and Libya; Hillary Clinton who, as Secretary of State, has had to deal with a number of international crises; Governor Scott Walker (R-WI); and Grover Norquist, whose "no-new-tax" pledge has played a pivotal role in Congressional and GOP Presidential politics.

But to me, the big story of the year has to be the global economy, in particular, the cascading fiscal crises spreading across the European union, shaking the euro, a key currency competitor to the dollar. The budgetary crises were inevitable: a slow-growing or even declining population, expanding retirement lifespans without additional revenues or reserves to accommodate pensions, government employment regulations which discourage new hiring, an increasingly unsustainable social welfare net unable to keep up with increased demand, and sluggish economies. We are seeing a cascading affect on various countries, with Greece, Ireland, Spain, Portugal, and Italy (all of the above except Italy with deficits running at 10% or the above in 2009 and heavy national debts overall). Even France and England have seen strong protests to modest reforms in things like phased age eligibility for retirement and increased user shared costs for universities. One can only wonder how German Chancellor Angela Merkel, listed by Forbes as the most powerful woman in the world, can continue or extend policies potentially morally hazardous, aiding irresponsible European neighbors.

I have not focused to date in this blog of a very important event that occurred at the close of November. Consider the following summary from PIMCO's Crescenzi:

Federal Reserve Chairman Ben Bernanke continues to show he is one of the few true deciders these days on the global policy stage. On 30 November, the Federal Reserve, along with five other central banks including the ECB, announced enhancements to their existing U.S. dollar liquidity swap arrangements. These provide for the Fed to swap dollars in exchange for other currencies, in unlimited amounts, through 1 February 2013, at a rate of about 60 basis points (bps) – down from about 110 bps previously....For Europe, the swap line enables the ECB to borrow dollars and then lend those dollars to European banks, which are sorely in need of funding because the world is playing hot potato with their debts...Keep in mind that any use of the Fed’s swap facility expands the Fed’s monetary base: All dollars, no matter where they are deposited, whether it be Kazakhstan, Japan or Mexico, wind up back in an American bank. This means that when the Fed’s swap line is used, the Fed will create new money. This in some ways makes the swap line a backdoor way to engage in quantitative easing.

Crescenzi is a big Ben Bernanke fan, which was clear in an earlier post, "Ben Bernanke the Decider":

[Filling the void of leadership] is Ben Bernanke, the veritable Sultan of Swat. From the very beginning of the financial crisis, Bernanke has been unflinching and audacious, never compromising, going to bat for the American people even under great criticism. Where political leaders have failed Bernanke has succeeded in providing continuous leadership at a time of crisis. There are many who are nonetheless critical of Bernanke and the Fed, believing the Fed’s actions pose substantial costs and risks to the United States...While it is true that the lowering of interest rates and the creation of $1.6 trillion of excess bank reserves poses substantial risk to price stability, this notion applies only when the transmission effects of monetary policy behave normally... what is both remarkable and instructive for the outlook for monetary policy is how active the Fed remains even though it has reached the zero-bound for interest rates. We today find ourselves contemplating a long list of potential Fed actions, ranging from several variations of QEIII to an abundance of communications strategies, including the potential for targets on inflation, growth, and/or employment, or perhaps guidance related to the size of the Fed’s balance sheet. 

Among other actions taken at the end of November was the Chinese agreement to lower its bank reserve requirements, which have been pumped to help constrain inflation hitting lower-income people (e.g., food and energy prices). The worry in this regard is the increasing global importance of a vibrant Chinese economy which has led to huge imports of materials from, say, Australia, South America, and Africa.

Crescenzi rightly points out that the European government bond problem is one of chickens which have come home to roost. The European central bank rightly focuses on price stability but it is prohibited from lending to governments (versus banks). It is also clear that the Europeans failed to require individual countries to make the tough decisions necessary in order to provide a sound base for the euro currency.

I agree that we are not going to see a significant lift to lending until we see American businesses and individuals feeling more confident in a secure economic future with a government that has learned to operate within its means and a more limited agenda. But among other things, I think that Ben Bernanke's activism is disconcerting; I am not heartened by the fact that the Chinese realize that soaring food and energy costs are a problem, but Bernanke has signaled that near zero interest rates will continue to be the policy for the indefinite near future. Just as European banks' chickens have come home to roost, a world awash in dollars is not going to end well.

The idea that we shouldn't increase interest rates because banks aren't lending anyway is, in my opinion, wrong-headed; raising rates now would signify that the US is going to defend the dollar for intrinsic reasons (not simply as a refuge from a sinking euro). A stronger dollar would enable us to manufacture value-added products at a more competitive price and make the dollars of lower-income workers go further; inflation is a very cruel tax consequence of wrong-headed neo-Keynesian economic policies.

I have concerns about American dollars being used to shore up European banks: after all, isn't it moral hazard  by essentially helping the Europeans stabilize their current crisis instead of finally facing the hard decisions they have to make (e.g., having the European central bank buy up government bonds and  as its price, demand fiscally responsible policies?)

And I don't like the fact that "Helicopter Ben" Bernanke is pursuing an activist role without the same transparency of the Congress (e.g., during TARP). Whereas there is a lot to be said about shielding central bankers from incessant administration and Congressional demands (from both parties through recent American history) for easy money vs. combating inflation, I have problems with Bernanke having a blank check to deploy potentially trillions of dollars globally, all of which can come back to haunt us in the long run. I have not seen enough use of the bully pulpit from Bernanke in dealing with Obama's upcoming decade of trillion dollar deficits and even steeper credit bureau rating drops.

Whether or not you approve of Bernanke's moves, there can be no doubt but his has become one of the most important voices during and after the recent economic tsunami; for that reason, I'm naming "Helicopter Ben" Bernanke my 2011 Man of the Year.