Mark Lamb | Sunday, 28 June 2009

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The curious case of Benjamin B.

Weekly international investment round up to 26th June 2009

Ben Bernanke testifies before Congress

Fed Chairman to add himself to unemployment figures in January?

It was another bizarre week in the life of Benjamin Bernanke, the embattled American Federal Reserve Chairman who testified before Congress on Thursday.
Former Bank of America boss, Ken Lewis, claims Mr Bernanke placed intense pressure upon him to take over investment bank Merrill Lynch last year even though he was aware of its financial difficulties. The multi-billion dollar deal eventually went through last September only for the Bank of America itself having to apply for billions in government support just a few months later. Following further intense pressure, this time from the Bank of America’s board, Mr Lewis was removed as the bank’s CEO in the spring.
This distraction for Mr Bernanke came at the same time as the Fed decided to leave American interest rates unchanged, this is important as such decisions can strangely affect us all. The Chairman of the Federal Reserve is one of the most influential and economically powerful positions in the world and any change in direction of interest rate policy there will eventually ripple outwards and can easily cause waves elsewhere.
Ben Bernanke was appointed to the Federal Reserve’s highest post at the beginning of 2006 taking over from the much respected Alan Greenspan who had held the post for 18 years and steered the US economy through the stock market crash of 1987, the emerging market crisis of the 1990s, the dotcom bubble of 2000 and the Twin Towers terrorist attacks in September 2001.
In my article of June 2006 entitled ‘The Bernanke Code’, I had also referred to this new Chairman’s tough choices regarding interest rates. Then standing at the pre-credit crunch level of 5.25% with US inflation sitting nicely between 2% to 3%, I had then commented ‘if he allows inflation to creep upwards, bondholders and lenders would see a steady erosion of their capital. Higher inflation may then lead to a cycle of more price increases and demands for wage increases as was seen in the 70’s with double-digit inflation, spiralling interest rates and stagnant growth. Squeeze too hard in order to keep inflation under control and this may lead to a reduction in economic growth and lower corporate profits which in turn stalls the stock market. Then, instead of achieving steady economic growth, failing companies may start to lay off more workers and unemployment becomes a huge problem. This is a difficult code to crack.’
Three years on, America is experiencing the worst recession in generations, unemployment levels at 9.4% and heading towards the post World War II record rate of 10.8% reached in 1982 and current US interest rates at almost zero percent.
Just as Benjamin Button aged backwards it would appear economic performance under Benjamin Bernanke has been slammed in to reverse.
Whatever the consequences of last week’s Congressional enquiry Mr Bernanke may find himself adding to US unemployment figures in January when his term as Chairman expires. President Obama may then decide to exorcise another of his predecessor’s ghosts which in turn allows him to take full credit for any upturn when it eventually comes. A curious case indeed.

Mark Lamb is Head of the Life Dept. at Citadel Insurance plc which is authorised to carry on general and long term business of insurance under the Insurance Business Act, 1998 and is regulated by the MFSA. Contact by email; mlamb@citadelplc.com Tel; 25579000. Website; www.citadelplc.com
This article does not intend to give investment advice and its contents should not be construed as such. Information in this article has been obtained from various public sources and is given by way of information only. Readers are always encouraged to seek financial advice before making any investment decision.

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