Wednesday, October 26, 2005

A New Sheriff in Town (Part 2)

There was big news from Washington on Monday (and no, it had nothing to do with “President” Bush finally figuring out that day’s Blues Clues…though that would be big news, wouldn’t it?) On Monday it was announced that Federal Reserve chairman Alan Greenspan will retire, as planned, in January and will be replaced (pending Senate confirmation) with Ben Bernanke.

Now, as I wrote yesterday, there are a plethora of reasons to like Mr. Bernanke: he's qualified (eminently so) for the post, he is, after all, a former Fed governor (the Federal Reserve is a system of regional banks headed by Fed governors). He is also chairman of the president's Council of Economic Advisers and a noted economist who has taught at Princeton.

Now, I’m not naïve and I know that, obviously, there are some politics involved with this choice (but not much cronyism it would seem. Wow, who would have ‘thunk’ it… Bush is still President, isn’t he?) but it seems that, for the most part, Bernanke is likely to continue Mr. Greenspan's steady guidance on U.S. economic policy.

Bernanke (or ‘Bernie’ as I am sure ‘Dubya’ calls him) will have his work cut out for him as several unfriendly forces threaten the U.S. economy in the coming years, some even forming as I write this blog:

  1. An overextended housing market that's dependent on uncertain loans. The larger concern here is consumers' expectations that their houses will yield high investment returns and, thus, protract their current levels of consumption. If their home equity loans can't keep up, the economy and the markets might suffer.
  2. Gas prices so high that they can threaten consumption in other areas of the economy. Think about this: a family of 4 has a choice. Fill up their cars/minivan/SUV or purchase groceries… or go to a movie… or (more drastically) pay a bill. This will probably be the highest hurdle Bernanke will face… and the one that will define his chairmanship.
  3. Inflation. We know inflation is neither a sustainable nor a good trend any way you look at it. A general increase in prices stops somewhere, with someone getting the short end of the stick. Who will it be in the coming years… time will tell.
  4. The troublesome current deficits in both our national budget and our foreign trade. The deficits might lead to higher interest rates if they persist long-term and, as I’m sure we all know interest rates have become the Federal Reserve’s bread and butter in recent years.
  5. A new bankruptcy law. While this isn’t necessarily Bernanke’s problem (since he is not able to change the law) he does have to maintain a particular view or the new law could push already stretched consumers deeper into debt. Think about it…the very consumers hampered by current debt levels are those experiencing the greatest suppleness in purchasing habits. If this continues and the new bankruptcy law exacerbates it… something will have to give.

Finally… a shout out to Mr. Greenspan, thank you for a (relatively) calm 18 years at the helm. You've done a remarkable job, and we hope you'll find retirement tranquil and pleasurable. If you don't, let me know.

Mr. Bernanke; congratulations and welcome to the party, though you have inherited what may be the toughest second act since Dick Sargent replaced Dick York as Darrin Stephens in Bewitched (the 60's TV show - not the recent movie bomb)

No pressure though...

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