Weekly international investment round up to 23 June 2009
• Ben Bernanke to testify before Congress
• Fed Chairman to add himself to unemployment figures in January?
It’s likely to be another bizarre week in the life of Benjamin Bernanke, the embattled American Federal Reserve Chairman who is scheduled to testify before Congress tomorrow.
Former Bank of America boss, Ken Lewis, claims Mr Bernanke placed intense pressure upon him to take over investment bank Merrill Lynch last year even though he was aware of its financial difficulties. The multi-billion dollar deal eventually went through last September only for the Bank of America itself having to apply for billions in government support just a few months later. Following more intense pressure, this time from the Bank of America’s board, Mr Lewis was removed as the bank’s CEO in the spring.
This distraction for Mr Bernanke comes at the same time as the Fed decides upon the direction of American interest rates which strangely affects us all. The Chairman of the Federal Reserve is one of the most influential and economically powerful positions in the world; any change in direction of interest rates there will eventually ripple outwards and can easily cause waves elsewhere.
Ben Bernanke was appointed to the Federal Reserve’s highest post at the beginning of 2006 taking over from the much respected Alan Greenspan who had held the post for 18 years and steered the US economy through the stock market crash of 1987, the emerging market crisis of the 1990s, the dotcom bubble of 2000 and the Twin Towers terrorist attacks in September 2001.
In my article of June 2006 entitled ‘The Bernanke Code’, I had also referred to this new Chairman’s tough choices regarding interest rates. Then standing at the pre-credit crunch level of 5.25 per cent with US inflation sitting nicely between 2 per cent to 3 per cent, I had commented: “If he allows inflation to creep upwards, bondholders and lenders would see a steady erosion of their capital. Higher inflation may than lead to a cycle of more price increases and demands for wage increases as was seen in the 70s with double-digit inflation, spiraling interest rates and stagnant growth. Squeeze too hard in order to keep inflation under control and this may lead to a reduction in economic growth and lower corporate profits which in turn stalls the stock market. Then, instead of achieving steady economic growth, failing companies may start to lay off more workers and unemployment becomes a huge problem. This is a difficult code to crack.”
Three years on, America is experiencing the worst recession in generations, unemployment levels at 9.4 per cent and heading towards the post World War II record rate of 10.8 per cent reached in 1982 and current US interest rates at almost zero per cent.
Just as Benjamin Button aged backwards it would appear economic performance under Benjamin Bernanke has been slammed in to reverse.
Whatever the consequences of this week’s Congressional enquiry, Mr Bernanke may find himself adding to US unemployment figures in January when his term as Chairman expires. President Obama may then decide to exorcise another of his predecessor’s ghosts which in turn allows him to take full credit for any upturn when it eventually comes. A curious case indeed.
