Federal Reserve Unsupported by Credibility - 2

Federal Reserve Power Unsupported by Credibility

By
Henry C.K. Liu

Part I: No Exit

Part II: Facing a Lost Decade Ahead

Ben S. Bernanke, who has just been reappointed a second term as Chairman of the Federal Reserve by President Obama, has announced repeatedly his decision to turn the traditionally secretive Fed into a more open institution, saying his unusually large number of recent public appearances is the result of the “extraordinary” times the economy faces. It appears that the extraordinary times that both Chairman Bernanke and President Obama concede as likely to last a long time may well turn into a lost decade for the US economy while waiting for an anemic jobless recovery.

Troubling Economic Projections

White House Budget Director Peter R. Orszag predicts that US unemployment will surge past 10% in 2009 and the fiscal budget for 2010 will reach $3.7 trillion while the fiscal deficit will reach $1.5 trillion, some 40% over revenue. The figures are higher than previous administration forecasts because of a recession that was deeper and longer than expected by administration economists. The White House Office of Management and Budget (OMB) Mid-year Economic Review forecasts a weaker economic recovery than it saw in May, as the gross domestic product is expected to shrink 2.8% in 2009 before expanding 2% in 2010 from a lower base. The Congressional Budget Office (CBO), in a separate assessment, forecasts the economy will grow 2.8% in 2010 from a low base. Both see the GDP expanding 3.8% in 2011, an optimistic forecast likely to be revised downward by actual events.

“While the danger of the economy immediately falling into a deep recession has receded, the American economy is still in the midst of a serious economic downturn,” the White House OMB report said, adding: “The long-term deficit outlook remains daunting.” What the Administration and the Fed have done is to halt the sharp downdraft in the economy with measures that will guarantee a protracted lackluster recovery when it comes.

Budget Shortfall Projections

The Obama budget shortfall for 2010 would mark the second consecutive year of trillion-dollar fiscal deficits. Along with the unemployment numbers, the fiscal deficit may weigh heavily on Obama’s faltering drive for his top domestic priority, reforming the US health care system, a long overdue urgent task. Obama’s hope for change cannot be fulfilled without a vibrant economy. It cannot be financed with fiscal deficits. (MORE)