Can Bernanke Get Out Of the Greenspan Cycle?

Yesterday, Obama announced the re-nomination of Ben Bernanke to the post of Federal Reserve chairman. Bernanke is considered to be the best candidate to rescue the market. If the Federal Reserve chairman is replaced when the future of the U.S. economy is still unclear, the stability of the U.S. economy will face an even greater risk.

Although it is said that Bernanke has been credited with rescuing the market, his next term will be judged on his ability to make the economy recover smoothly. Bernanke’s non-conventional market rescue operation opened the doors up for his second term, but he must beware of currency fluctuation and the possible resulting inflation. The inflation during the Greenspan era is a remote cause of this financial crisis, but if Bernanke cannot rescue the market, perhaps this will cause the next round of inflation and crisis. The people wait to see whether Bernanke will get out of this strange cycle.

Obama said that Bernanke’s wisdom, resolute and non-conventional thinking stopped the free-falling market. In 2002, he (Bernanke) said: “if the market is in need, the Federal Reserve can make it possible to immediately send a helicopter to scatter money onto Wall Street.” This well-known expression has finally turned into reality.

In order to save the American economy, Bernanke has formulated a series of market rescue plans which provide emergency loans, adding huge mobility to the market at a time when U.S. interest rates are at a historical low. His faults also received a lot of questioning; in the beginning stages of the financial tsunami, Bernanke made a delayed response to rescue the market and stood by at Lehman’s bankruptcy, directly triggering the global crisis.

Although Bernanke once delayed an opportunity to rescue the market, he has adopted “non-conventional monetary policy,” including extending credit to investment banks, supporting the commercial paper market and participating in the rescue of Bear Sterns and the American International Group, as well as promising the purchase of $1.7 dollars of public debt, agency bonds and mortgage-backed security.

This was a bold and decisive way to carry out his radical and loose policy to guarantee the financial system’s mobility, just like “the cocktail-type mix therapy,” effectively saving the collapse of the U.S. financial system. Bernanke also firmly supports the Obama administration, pushed the United States Congress to adopt the economic stimulus plan and stopped the U.S. economy’s rapid decline.

But Bernanke’s real test will be in his next term. In order to deal with the financial tsunami, he must use non-conventional methods to bury the financial bomb for America and the global economy. At present Bernanke is facing a dilemma. If he starts deflation policy, the American economy will weaken and recovery will possibly be strangled, falling into decline once again. If he continues quantification policy, then the low interest rate environment will continue, inevitably initiating global hyperinflation.

The hyperinflation foreshadows the next round of the crisis. How will Bernanke determine the exit mechanism of his loose monetary policy to avoid the dramatic rise of the property bubble, stabilize the declining tendency of the U.S. dollar and to eliminate the next round of hidden crises? This will be a significant test.