Loading...
Symbols:
Authors:

Bernanke Seems Willing To Allow More Downturn Than Greenspan

by: Larry MacDonald June 08, 2008    
Larry MacDonald

Larry MacDonald

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

This past week the news flow rekindled recession fears in the United States. Lehman Brothers came under a cloud again, the credit ratings of bond insurers Ambac and MBIA were downgraded, May unemployment showed a jump from 5% to 5.5%, and crude oil shot up to a record $139 a barrel.

The U.S. was headed for a recession in 2001 but Federal Reserve Chairman Alan Greenspan dodged it with a dramatic reduction in interest rates and the help of a bubble in real estate. My guess this time around is that current Fed Chairman, Ben Bernanke, is willing to allow more of a downturn to emerge.

One sign: Bernanke drained the liquidity created by his rescue of the U.S. financial system to keep high-powered money on an even keel. Another sign: his recent speech about the need to avoid further interest-rate decreases to keep the U.S. dollar from going into a tailspin and fueling inflationary pressures.

Then there is the greater inflation threat in 2008. Prices for commodities and agricultural products are soaring. The consumer price index may still be relatively well behaved but the person in the street is complaining about inflation feeling higher than reported, thanks largely to gasoline and food prices. And investors are less willing to hold bonds as demonstrated by the recent run-up in their yields. The last thing Bernanke wants to see is an inflation psychology take root, where people seek to recoup lost purchasing power through bargaining for higher wages and demanding higher bond yields.

Politically, the timing for a downturn is about the best one can hope for. It’s early in Bernanke’s term and the term of the next President. There will be plenty of time to turn things around and get the show back on the road over the course of their terms.

Related Articles

This article has 22 comments:

  •  
    Jun 08 10:06 AM
    The main difference between Bernanke and Greenspan is that Greenspan was still in a position to take certain decisions that are impossible today. The Real Estate bubble has busted at a point where interest rates are extremely low and the creation of money out of thin air has and is creating a huge inflation that will become a hyperinflation. The only thing Bernanke can do is to try to delay the crack up boom and the hyperinflation by propaganda.
    If he would do what should be done, I am sure we would see a revolution or a civil war in the US.
    Reply
  •  
    Jun 08 10:13 AM
    I agree with the article, and I agree with Francis. Some serious belt tightening and a good dose of reality is long overdue.
    Reply
  •  
    Jun 08 10:20 AM
    Barnanke has no choice. One reason we are in the position we are now is because of Greenspan and his easy money policies. Greenspan had the fortune of low stated inflation--so it didn't matter how much money he pumped into the system. Now, we have stagflation. If you put more money into the system, you have higher inflation. If you rise rates you growth will be less than we already have. He is between a rock and hard place. I write about the conflict between government and Markets @ theinvestingspeculator...
    Reply
  •  
    Jun 08 11:35 AM
    Francis,

    There will not be a revolution in America anytime soon as long as there is some semblance of a middle class and a healthy amount of white people; white people gave up revolution a while ago.
    Reply
  •  
    Jun 08 01:05 PM
    "white people gave up revolution a while ago."

    white people have unleashed plenty of death and destruction throughout the world. have you ever heard of the nazis? have you ever heard of the ku klux klan?

    you'd have fit right in. now you're just a closet racist.

    Reply
  •  
    Jun 08 01:15 PM
    As the captain of the ship that is US economy, Bernanke appears to be reacting rather than anticipating. Since the time he became fed chairman, Bernanke have failed to create sense of credibility. The failure of Bernanke FED is showing up in rapid fall of USD vs. Euro and rising commodity prices. It is quite unfortunate that failure of monetary/fiscal policy in US is doing the most harm to poor countries who can least deal with rising commodity prices. I hope the next president's first act is to ditch Bernanke and restore sense of credibility to the FED and thus USD.
    Reply
  •  
    Jun 08 01:34 PM
    Unemployment is a statistic. One person that wants to find a job is not a statistic...if one wants one job they will find it:

    www.realmatch.com
    www.monster.com
    www.careerbuilder.com

    You see?
    Reply
  •  
    Jun 08 02:20 PM
    icandoitdon,

    I did not say white people were not / are not capable of violence or atrocities. Stop being such a narrow minded knee jerk. As long as there are a class of people afraid of losing what material possessions and social status they may still have, you will be hard pressed to have a revolution in the streets. The middle class in this country is still predominately white and too complacent for "revolution"... unless you count college aged kids wearing Ché tee shirts as revolutionaries.

    BTW, calling someone a Nazi is hyperbole, don't you think?
    Reply
  •  
    Jun 08 05:36 PM
    Um, no. Watch what he does not what he says.

    He sets interest rates at 2%, far below the rate of inflation. He puts hundreds of billions of taxpayer dollars at risk by financing the Bear Stearns deal and then lending directly to any investment bank with dodgy collateral.

    A little speech about inflation concern does not change what he's done.
    Reply
  •  
    Jun 08 05:42 PM
    I totally agree, an old fashion Revolution is the only solution.
    Opps, I forgot a small detail, Didn't our government just took all our civil liberties away under the terrorism pretext?
    I think marching in the streets would not be very safe unless you like getting detained and sent to Guantanamo. Plus the average idiot is too busy watching American Idol, he must rather complain than take action.
    True unemployment at 12%, food priced have increased 60% in a year, Gas will hit $7/gallon by December. Most people cant afford to get sick even if insured, 60% of the homes purchased in FL in 2007 have negative equity and we are blowing 1 bil a week in Iraq.

    If the above desn't inspire a revolution I dont know what will.
    You can't fix stupid.

    I am loving my retirement in Cost Rica.
    Reply
  •  
    Jun 08 06:12 PM
    Why does nobody bring up the difference between Alan Greenspan and Ben Bernanke by looking at the minutes of the policy setting meetings?

    Under Alan Greenspan they were full of detail that had no broad significance anyway and under Ben much of those details are stripped but we still miss rather imported information about for example debt growth.

    Total debt of the US economy on herself is above 50 trillion (this explains also why the FED rates are always so low compared to normal economies).

    A very readable file is the next:

    www.federalreserve.gov...

    Add up the relevant 'total' columns, observe that this file says US Federal debt is only 5244.5 billion but use the official debt ceiling as a better estimate and you see:

    Total debt of the US economy on herself is above 50 trillion US$.

    At an average interest level of 5% the yearly interest payments would be 2500 billion or about the same size as the government takes in via taxes.

    To put it simple: Never ever the US FED rate will make it too 5% because most Americans know that low taxes are good for the economy...
    Reply
  •  
    Jun 08 06:50 PM
    h-bomb....

    ok you've clarified your comments. i misunderstood your reference to "white people" and i apologize.

    i agree with your assertion that we have a complacent middle class, whatever it's color. whites will soon be a minority in this country.
    Reply
  •  
    Jun 08 09:54 PM
    What Bernanke seeks to to is maintain "delusionary expectations".

    Will it take another Great Depression and World War before fractional reserve banking is reconsidered?

    I will write in Ron Paul's name this Nov. He can take where we need to go to prudently and moderately. But if a Revolution comes, I will scream the loudest "Don't forget the bankers this time!"
    Reply
  •  
    Jun 08 10:13 PM
    It is so convenient to blame Nazi for everything.

    Stalin and Mao have killed many times more people than A. Hitler.

    Nazi did not invent extermination gas-chambers and concentration camps. Extermination gas-chambers were invented and widely used by Bolsheviks in 1920s. The first concentration camps were invented and used by British.

    The real initiator of the WWII was not Hitler. The main driver forces behind the war were J. Stalin and FDR.

    Yes, Nazi committed lots of crimes but during their colonial times British commited much more crimes specifically in India.

    Finally, Americans use A-bombs to kill endless civilians in Japan. The plan B, if America did not have A-bombs, was to gas millions of Japanese.

    So much about bad Nazi and good American.
    Reply
  •  
    Jun 09 03:28 AM
    oh boy, what has this discussion turned into, bombs and atrocities, too hard to concentrate on the topic at hand, Greenspan versus Benny. I think Benny will do just fine, Greenspan was a retard, Ben is a rigorous economist and will be proven by the test of time.
    Reply
  •  
    Jun 09 09:27 AM
    I hope Ben is a very good economist, that way the Fed itself will be discredited the next few years. BTW, Greenspan was supposed to be a wiz. A lot of people sung his praises while the bubbles were inflating.
    When brilliant men cause havoc, it is time to rethink the system they operate in.
    Reply
  •  
    Jun 09 10:42 AM
    Boy OH Boy! For all the controversy above, I say only this,"God Bless America"! A place we can share this type of forum and not be shot or jailed..although under GWB we could be detained...(for up to 10 years) but that aside...Greenspan is a brilliant man, the people who destroyed the economy are the same who spent Trillions on a war that was a big LIE!..Yes they will be tried after their term ends! We the people will eventually recover from the recession we are in. But WE THE PEOPLE must have another tea party to show our dissatisfaction with the Republican way of life and their lack of Liberty and destruction of our pursuit of happiness.
    Reply
  •  
    Jun 09 10:57 AM
    OH, I forgot to mention!! All the Billionaires out there who think they can buy their way out of the next natural disaster beware! All the money in the world will not buy help from the over taxed hunter, nor the over worked seamstress, so think before you cut and destroy; be kind and mindful of your future and the cost of a quick buck, during the next extinction level event of this world. God forgives! People dont!.
    Reply
  •  
    Jun 09 11:45 AM
    Wow. Lets stay closer to economics and the fed. We have a major structural problem - we spend more than we produce, as individuals and as a country. "Globalization&qu... has allowed us to call on the resources of the rest of the world, as long as we controlled the IMF, the US dollar was the world currency, and countries like Japan and Saudi Arabia relied on us for protection. It would seem that that era is ending. While a point or two on interest rates won't change the fundamentals, it is a good thing that Bernanke is a good economist, understands the politics of it, and is creative in using all of the tools at his disposal. But, in the long run, the problem rests with all of us. Still, no politicians calling for constraint and sacrifice.
    RightinSanFrancisco.co...
    Reply
  •  
    Jun 09 11:45 AM
    inflation psychology ????????? HEY BENNIE...CHECK THE STORES
    Reply
  •  
    Jun 09 11:52 AM
    actually, the so-called homeland security crew is turning into the american gestapo...just wait a few years

    and...dont forget pol pot, the clauldian emperors, etc.

    ad infinitum ad nausem

    and .... the japanese used the bomb thingee to save face....they knew we only had two...try reading history
    Reply
  •  
    Jun 09 02:01 PM
    "But, in the long run, the problem rests with all of us. Still, no politicians calling for constraint and sacrifice. " Right in
    San Francisco

    Puleeze! When we have an honest banking system then I will consider other culprits. Consider this: what came first the Federal Reserve or the Great Depression/New Deal which led to all the social spending today? Don't blame the victims, please.

    for more info on the Fed:

    www.lewrockwell.com/ro...
    Reply
More by Larry MacDonald
Articles on related themes
Today's Market
Economy
Dollar/Currencies
Bonds