No Captain America to save the US economy

Business Times - 12 Aug 2011

No Captain America to save the US economy


ONE of this summer's film hits is the silly but entertaining Captain America: The First Avenger. Based on the comic book superhero, the movie tells of a short and frail young man who is transformed into a super soldier that leads US military forces to victory over Nazi Germans.

In the real world, the US did defeat Nazi Germany and Imperial Japan in World War II. But that military victory was achieved only after America's political and military leaders had formed a powerful international alliance and deployed the largest military force in human history.

Fast forward to today and Washington's response to the rising threats to the US and global economy seemed to be taking place in a make-believe world. Political paralysis makes it impossible for the White House and Congress to do anything more than establish a Super Committee that should - but probably won't - come up with a plan to put US fiscal house in order.

That may explain why there was so much wishful thinking in Washington and Wall Street in the aftermath of the bitter political fight over the debt ceiling and the ensuing Standard & Poor's downgrade of the US debt rating - and before the Federal Reserve's policymaking committee meeting on Tuesday.

The markets expected the low-key and soft-spoken former professor by the name of Ben Bernanke and his team of nerdy economists to save the day, substituting for the entire political leadership in Washington. They were expected to succeed where the White House and Congress have so miserably failed. The Fed would launch a new round of quantitative easing (QE3) or something along these lines that will help bring back to life a moribund economy.

But the Fed chairman did not turn superhero. Instead, he was, at best, the hero of the day in Washington and Wall Street. The Fed's policymaking committee announced on Tuesday that interest rates for banks that borrow from the Fed would remain near zero per cent for the next two years, a move that was described by some pundits as 'unprecedented' and 'bold' and a 'breakthrough'. For more than two years, the Fed has kept saying that it would keep interest rates low for 'an extended period' which is Fedspeak for 'a while'. By insisting that they would keep the rates low at least through the middle of 2013, the Fed was signalling a policy change of sorts.

Indeed, the Fed's announcement helped provide a certain level of clarity for the markets that abhor uncertainty. In a way, what Mr Bernanke and his colleagues have done was to counteract the fears ignited by the S&P downgrade - that interest rates would rise and slow the economy. The Fed was basically assuring the markets that that would not happen for the next two years. Global stock markets were excited - at least for while - after the Fed issued its statement.

But then, there was the big downside to the Fed's announcement in the form of an admission that the economy will be stuck in slow growth - and perhaps no growth at all or even slip into another recession - for at least another two years.

Which gets us back to square one: If the current sluggish economic recovery - and it certainly does not look at all like a recovery on Main Street - is just another example of an economy making very slow progress after a devastating financial meltdown, then the Fed's decision to keep interest rates low could help.

But if the American economy is facing deep structural problems, including an unqualified workforce, crumbling infrastructure, a failing education system - all of which is made worse by the mounting deficits - only the White House and Congress have the power to do something really big, a la Superhero, to fix that. But the politicians don't seem to have the will to do what is necessary. And the Fed cannot force them to cut spending and raise taxes and get the US economy moving again.

Some fans of the Fed note that, in its statement on Tuesday, the policymakers also stressed that they would continue to monitor and review and take any action necessary to the size and composition of their balance sheet, which could mean that the Fed was opening the door to additional quantitative easing in the future, and that Mr Bernanke may announce his intention to move in that direction at the Jackson Hole, Wyoming, meetings later this month.

But then Mr Bernanke may be facing strong opposition of some of the policymakers on the Fed's board who, very much like conservative Republicans on Capitol Hill, are worried that low interest rate policies could risk inflation and drive the US dollar down.

Indeed, the intense debate inside the central bank - not unlike the one taking place in the rest of Washington - could make it quite difficult for Mr Bernanke to even try playing the role of a superhero.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.


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