Tuesday, August 25, 2009

Is the US political system capable of bringing about change that does not perpetuate the interests of the elite?


he stood with his predecessor – serial bubble-blowing Alan Greenspan – who argued that monetary authorities are best positioned to clean up the mess after the bursting of asset bubbles rather than to pre-empt the damage. "

Editorial Comment

The biggest criticism of US Policy is that they their planners are not adjusting to the new realities represented by globalisation, the failures of US Foreign policy, the loss of faith in the dollar and the apparent lack of any ethics in the general economic environment. I believe it is less a case of the planners not being aware of the need to make fundamental changes as the fact that these changes will hurt some major players and their interests and therefore will not be allowed to happen.
A consumer economy based on the good credit standing of the US will have to undergo change when the US is no longer AAA but this is a tough sell to the powerful retail Industry. A foreign policy that hurts the interests of AIPAC and the defense Industry is a non starter.
Is the US political system capable of bringing about change that does not perpetuate the interests of the elite? This is the biggest hurdle when the answer is " unlikely". While the non elite forces are greater in number, they still lack the organisation to have an impact. There is a growing sense of frustration that the Democratic Party is too much in the grip of the elite. It is only less elitist to the extent that the Republican party is far more racist and for the time being the Democratic President is black.
The forlorn hope that a grass roots movement will revolt and bring about change rises perpetually in the American heart. What will this grass roots movement be based on? Anti race, resistance to war or a concern for the environment. I believe neither of these. People will revolt, when they do, because of economic injustice. The lack of jobs, housing,reasonable heath care and adequate educational opportunities will bring out people on the streets faster. Not until people come out on to the streets to express their point of view will any one sit up and take notice. I believe that we need to build up the platform for Economic Justice within Wespac and build awareness not just for a better life but specially for meeting the basics of life. Until such time that we can show the way of achieving this both through mobilising and education, we cannot give the hope to the distressed that is needed. Hope will come with success and success will come through more vigorous and effective action. The message is quite clear, we cannot wait for Obama to deliver. It should be enough that he is there, we need for ourselves to mobilise and deliver.


The case against Bernanke
By Stephen Roach
Published: August 25 2009 16:02 | Last updated: August 25 2009 16:02
Barack Obama has rendered one of his most important post-crisis verdicts: Ben Bernanke will be nominated for a second term as chairman of the Federal Reserve. This is a very shortsighted decision. While America’s head central banker deserves credit for being creative and courageous in orchestrating an unusually aggressive monetary easing programme, it is important to remember that his pre-crisis actions played an equally critical role in setting the stage for the most wrenching recession since the 1930s. It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.
Mr Bernanke made three critical mistakes in his pre-Lehman incarnation: First, and foremost, he was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles. On this count, he stood with his predecessor – serial bubble-blowing Alan Greenspan – who argued that monetary authorities are best positioned to clean up the mess after the bursting of asset bubbles rather than to pre-empt the damage. As a corollary to this approach, both Mr Bernanke and Mr Greenspan drew the wrong conclusions from post-bubble strategies earlier in this decade put in place after the bursting of the equity bubble in 2000. In retrospect, the Fed’s injection of excess liquidity in 2001-2003, which Mr Bernanke endorsed with fervour, played a key role in setting the stage for the lethal mix of property and credit bubbles.

Second, Mr Bernanke was the intellectual champion of the “global saving glut” defence that exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia. While there is no denying the demand for dollar assets by foreign creditors, it is absurd to blame overseas lenders for reckless behaviour by Americans that a US central bank should have contained. Asia’s surplus savers had nothing to do with America’s irresponsible penchant for leveraging a housing bubble and using the proceeds to fund consumption. Mr Bernanke’s saving glut argument was at the core of a deep-seated US denial that failed to look in the mirror and pinned blame on others.

Third, Mr Bernanke is cut from the same market libertarian cloth that got the Fed into this mess. Steeped in the Greenspan credo that markets know better than regulators, Mr Bernanke was aligned with the prevailing Fed mindset that abrogated its regulatory authority in the era of excess. The derivatives’ explosion, extreme leverage of regulated and shadow banks and excesses of mortgage lending were all flagrant abuses that both Mr Bernanke and Mr Greenspan could have said no to. But they did not. As a result, a complex and unstable system veered dangerously out of control.
Notwithstanding these mistakes, Mr Obama may be premature in giving Mr Bernanke credit for the great cure. No one knows for certain as to whether the Fed’s strategy will ultimately be successful. The worst of the US recession appears to have been arrested for now – a fairly typical, but temporary, outgrowth of the time-honored inventory cycle. But the sustainability of any post-bubble recovery is always dubious. Just ask Japan 20 years after the bursting of its bubbles.
While financial markets are giddy with hopes of economic revival – in part inspired by Mr Bernanke’s cheerleading at the Fed’s annual Jackson Hole gathering – there is still good reason to believe that the US recovery will be anaemic and fragile. US consumers are in the early stages of a multi-year retrenchment as they cut debt and rebuild retirement saving. The unusual breadth and synchronicity of the global recession will restrain US export demand from becoming a new growth engine.
It would be the height of folly to reward Mr Bernanke for the recovery that never stuck. Yet Mr Bernanke’s apparent reward is, unfortunately, typical of the snap judgments that guide Washington decision-making. In this same vein, it is hard to forget Mr Greenspan’s mission-accomplished speech in 2004 that claimed “our strategy of addressing the bubble’s consequences rather than the bubble itself has been successful”. Eager to declare the crisis over, the Obama verdict may be equally premature.
The Bernanke reappointment is a welcome chance for a broader debate over the conduct and role of US monetary policy. Mr Obama has made sweeping proposals that give the Fed broad new powers in managing systemic risks. I argued in the Financial Times 10 months ago that the Fed should not be granted these powers without greater accountability as required by a “financial stability mandate” – in effect, forcing the Fed to shape monetary policy with an aim towards avoiding asset bubbles and imbalances. Without a revamped policy mandate, it is conceivable that we could face another destabilising crisis.
Ultimately, these decisions boil down to the person – in this case, Mr Bernanke – who is being charged with the awesome responsibility as America’s chief economic policymaker. As a student of the Great Depression, he should have known better. Yes, he reacted strongly after the fact in taking actions to avoid the pitfalls highlighted by his own research. But he lacked the foresight and courage to resist the most reckless tendencies of the era of excess. The world needs central bankers who avoid problems, not those who specialise in post-crisis damage control. For that reason, alone, he should not be reappointed. Let the debate begin.

The writer is chairman of Morgan Stanley Asia and author of The Next Asia to be published next month

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