Getting it Right on the U.S. Economy

Benjamin Bernanke, Chairman, US Federal Reserve Bank


In all of the recent hand-wringing over the economy it is easy to forget that the world economic outlook is not uniformly bleak. Residents of China, India, Russia and Dubai are more likely to be complaining of growth pains and shortages than looming unemployment. In their great race to build housing and infrastructure, they have been bidding up world prices for oil and other commodities, just as North American farmers decide which crops to plant to feed and now fuel a hungry world.

If one shifts attention from depressed Ohio and Michigan factory towns toward Peoria and Moline, Illinois where Caterpillar (CAT) and John Deere (DE) manage global operations for manufacturing and marketing agricultural and industrial equipment, the mood improves. Both companies have seen growth in both their US and international manufacturing operations. While each has been hurt by the downturn in the US housing market and its impact on US forestry, building materials, construction equipment and trucking, they are being more than compensated by increasing sales of construction equipment overseas and agricultural equipment both domestically and internationally.

With commodity prices continuing to rise and interest rates having fallen substantially in recent months, Americans should be concerned about the prospects for inflation, particularly for energy and foodstuffs, but also for imported electronics and automobiles. Policy makers know, but are loathe to admit, that there are no simple U.S. economic policies that can assuage the angst of the common man. More than at any point in their history, Americans operate in a global economy and the tried and true economic policies learned by the Elders during more self-sufficient times are much less effective now.

The uncertainty in the U.S. financial markets reflects not only the immediate risks in the housing sector but also the greater risk that American government leaders will take the wrong course. Fiscal moves to stimulate consumption, such as Congressional plans for temporary tax rebates, will feed inflation without addressing the underlying imbalance in housing debt. Interest rate reductions may have little effect on housing lending if too many lending institutions become insolvent and unable to lend at all.

Thus, it was with some relief that the markets saw Ben Bernanke take a measured, if previously untried, move toward stability by directly having the government take on some of the risks in mortgage-backed securities. By addressing the problem tactically and head-on, the Fed reduces the risk of doing greater mischief longer term.

Well done.

Now, if we could get the U.S. presidential candidates to speak more honestly about the American role in the global economy, they might come up with more sensible approaches to entitlements, health care, immigration and military policy. Forgive me the audacity of hope.

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