When the history of the 100-year old U.S. central bank (the Federal Reserve Board) is written, Chairman Ben Bernanke’s eight year span (likely his finale) will be known as the most unique and economy sensitive in the Federal Reserve’s history. Since founded in 1913, no Fed Chairman has ever faced such an era of unmitigated turbulence. Like President Franklin Delano Roosevelt, with whom Bernanke can best be compared in the uniqueness of his approach to pending disaster, Bernanke chose to focus on unemployment as the root cause of America’s troubles.
Bernanke quickly realized that both the presidency and both Houses of Congress were becoming so politicized that conventional legislation, plus lack of presidential leadership, would fail to solve a deeper economic puzzle. He chose to stick strictly to interest rate management. As a student of the 1930′s Great Depression, Bernanke came to the right conclusion that America’s central bank was the only independent U.S. institution that could take the action necessary to keep the U.S. from slipping into an economic abyss.
He, and a compliant Board of Directors used all the tools at their disposal, much of which had never before been utilized, to keep the U.S. monetary system liquid. This was needed to stem the tide of financial disintegration that was posed by “runaway” Treasury debt, and ballooning deficits. Unlike all of his predecessors, Bernanke made no secret of the fact that he would use the unlimited capability of the Federal Reserve Board’s balance sheet to jump its holdings from $1 trillion prior to the “Great Recession” to a recent $4 trillion. These purchases were primarily composed of U.S. Treasury “paper” along the six month to 30 year yield curve.
The Federal Reserve Board knew that a support of the ongoing weekly auctions to keep interest rates under control was necessary to maintain the near-record low interest rates of the debt curve. The “Fed” has for the past year resorted to quantitative easing, which of late has reached $85 billion monthly in participation in Treasury debt auctions, as well as buying up large portions of mortgage-backed derivatives. These had no market value and were clogging the financial arteries of America’s major banks. In turn, this situation had previously kept the financial institutions on the defensive by inhibiting their loan capabilities and making it more difficult for consumers and most independent businesses to assess the banks’ loan facilities.
Although the school is still out on the long-term impact of these Bernanke-orchestrated strategies, there is no question that the creative and independent economic involvement by the Bernanke Board has allowed the U.S. economy to keep its head above water. In this context, the current U.S. economy has actually become the focal point of worldwide investment. The U.S., as the world’s leader in annual gross domestic product, is now the number one target of available international investment commitments.
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