Global Agenda: Tea time

This recent US election has left both parties more extreme, less open to compromise and further apart than ever, when the economy requires some bi-partisanship.

By PINCHAS LANDAU
November 4, 2010 23:54
4 minute read.
Wall Street traders watch Obama's speech

311_Wall street traders. (photo credit: ASSOCIATED PRESS)

As expected, it’s been a helluva week. Indeed, at this time of writing, it’s not over, because in the financial sphere, the Bank of Japan will make its move at noon on Friday, Tokyo time, while in the economic sphere, early Friday morning in Washington will see the publication of the unemployment, wages and other monthly data regarding the US labor market.

But the big guns have already fired, and, although both the US Federal Reserve and the European Central Bank did almost exactly what was expected of each of them, the results have been significant in terms of market developments.

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The Fed committed to buying Treasury and perhaps other medium- and long-term bonds to the tune of $600 billion through next June. At about $75b. a month, this was slightly less than the consensus expectation but still a very large amount, and Bernanke and Co. were careful to stress that they would adjust this program in line with incoming economic data over time – in other words, if the economy still refuses to respond to this hefty dose of stimulus, more will be applied.

Over in Frankfurt, on the other hand, the ECB held its key interest rate at 1 percent and reiterated its determination to press ahead with winding down the emergency measures it took during the 2008-09 financial crisis. In short, the ECB is going in exactly the opposite direction to the Fed.

The Japanese are expected to announce their own stimuluscum- printing plan, while the Bank of England prefers to sit on the fence. But the Fed’s move, despite having been signaled in advance, was enough to renew the dollar’s fall against virtually all other currencies and spurred sharp rises in equities, bonds and especially commodities around the world.

Although ECB President Jean-Paul Trichet pretended to be unfazed by the Fed’s policy and professed not to believe that it was designed to weaken the dollar, others were much less sanguine and polite. Brazilian Finance Minister Guido Mantega – the man who last month announced to the world that a global currency war was under way – on Thursday called on the US in so many words to change its policy stance. He will not be alone in his approach; the G-20 meeting next week is likely to be quite raucous and undiplomatic, as a slew of developing countries attack the US over the global destabilization that its policies are generating or, more correctly, aggravating.

But the Obama administration and the Federal Reserve won’t need to travel abroad to have criticism heaped on them. The other big event of this week also took place in the US, but it involved rather more people than the roomful who participate in the Federal Open Market Committee’s discussions.

The mid-term elections also went pretty much as expected, but are nevertheless an important milestone. The rise of the tea party and the new congressmen who support its approach, not to mention that the Republicans now control the House of Representatives, will make it very difficult for the administration to advance new policy initiatives of any sort, let alone any big reforms.

But the political upheaval also presages a much more intensive effort by the Republican Right to rein in the Federal Reserve and to prevent it from conducting monetary policy as it sees fit. The traditional argument against this sort of involvement – that the central bank must remain independent of political pressures – will cut little ice with people such as Rep. Ron Paul of Texas, an avowed libertarian who has campaigned for years to abolish the Fed entirely. Paul is in line to become chairman of a committee, which will ensure that his spats with Bernanke will become regular media events and will, at the least, cause the Fed and its chairman considerable discomfort.

But the tea-party sweep was only a part of what this election wrought on the US body politic. Its success highlights the swing to the right in the Republican party, but its extremist views will make it more difficult for the GOP to capture the center and hence the presidency. On the other hand, the Democrats also swung – to the left. Many centrist Democrats – i.e., those on the right-wing of their party – lost their races, while left-wing Democrats fared much better.

This election has therefore left both parties more extreme, less open to compromise and further apart than ever. Since the only real hope for the American economy to regain its vigor is for a concerted bipartisan effort to pursue major reforms in areas such as the size and composition of the Treasury budget and the convoluted mess that is the US tax system, this election has moved the country in the wrong direction.

landaup@netvision.net.il


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