Economic Outlook: Bernanke's retreat

By ANTHONY HALL, United Press International  |  Aug. 31, 2012 at 9:40 AM
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The eyes and ears of the financial world are again focused on Jackson Hole, Wyo., which is symbolically as far from Wall Street and Washington as it gets.

With the sky scraped by mountains instead of steel, the site of the annual Federal Reserve retreat is almost too cozy for business suits. Yet, two of the world's most pivotal financial experts, Fed Chairman Ben Bernanke and European Central Bank President Mario Draghi, are set to spell out their current thinking on the challenges that face the global economy.

The Wall Street Journal said Friday Bernanke is no doubt considering his legacy, which began in the halls of academia and continued through Republican and Democratic administrations in Washington.

Bernanke's Princeton University background is an odd, fundamental part of the scenery now. In universities, it is easy to play armchair quarterback, and that, essentially, is the job description. The teacher's role is to say, "Let's see what would happen if X should occur ..."

That kind of exercise is relatively painless in academia. At a Federal Open Market Committee meeting, however, the guns are loaded and the safety switches are off.

Typically, while the financial system began to implode in 2008 and the Fed had to act fast, most decisions were announced with an apologetic caveat. "Under normal circumstances, we would never, ever do this," Bernanke seemed to be saying every other month or so.

No question at this point that the Fed's nimble adjustments in 2008 and 2009 restored liquidity and confidence in a system many said was heading for another Great Depression.

It should not be forgotten that Bernanke helped coordinate a global response. Central banks around the world became useful, suddenly. But the Fed's impact, it later seemed, did not go much farther than financial systems. Banks, in other words, healed quickly. But the economy remained lethargic.

That simply isn't the legacy that Bernanke wants to leave behind. Nominated by a Republican, Bernanke in no way would be satisfied with a swan song that says he put bankers back on their feet and left the man on the street to fend for himself. The repeated efforts to stimulate the economy are aimed at reducing unemployment, not pad pockets in the financial sector.

With inflation held in check, the Fed can afford such grandiose thinking. The trouble is, it is 2012 and the economy is still just scraping by.

Analysts say Bernanke's choice now boils down to a new round of quantitative easing or to leave well enough alone.

Quantitative easing is a big-ticket item with what some call paltry results. As reported in the Journal, economist Jan Hatzius at Goldman Sachs says a $500 billion bond-buying spree would bring down unemployment 0.1 percentage points. That isn't much, but Hatzius says it is worth it.

Similarly, Alan Sinai at Decision Economics says unemployment would decline 0.2 percentage points for that price. Sinai also says go for it, the Journal reported.

It is also assumed that quantitative easing would dilute the U.S. dollar, which gives U.S. exporters a boost. The demand for bonds also brings down the cost of borrowing.

What is left is figuring out whether that pool of liquidity will blow up in our faces in the form of future inflation. But that discussion can probably wait for another trip to Jackson Hole.

In international markets Friday, the Nikkei 225 index in Japan shed 1.6 percent and the Shanghai composite index in China slipped 0.25 percent. The Hang Seng index in Hong Kong fell 0.36 percent and the S&P/ASX 200 in Australia was flat, adding 0.01 percent.

In midday trading in Europe, the FTSE 100 index in Britain gained 0.49 percent while the DAX 30 in Germany rose 1.37 percent. The CAC 40 in France climbed 1.19 percent and the Stoxx Europe 600 gained 0.71 percent.

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