GLOBAL AGENDA: Collateral damage

The link between Bernanke and the price/affordability of your home, as well as the viability of your job, is clear and much closer than you think.

Obama at White House 370 (photo credit: REUTERS/Kevin Lamarque)
Obama at White House 370
(photo credit: REUTERS/Kevin Lamarque)
President Obama finally got around to formally announcing the nominee for the post of chairman of the board of governors of the Federal Reserve Bank – the position commonly referred to as “the second-most powerful in the United States.” Note that this was not HIS nominee, because the man Obama wanted for the job, Larry Summers, backed out of the race a few weeks ago.
Summers felt he had no choice because he had no chance.
Despite Obama’s clear blessing, the Democrats in the Senate – Obama’s own party, mark you – made it clear that they would not support his nomination. Having thus been loudly and very publicly slapped in the face by his own party, Obama was obliged to nominate Janet Yellen, whom he does not want but who will sail through the nomination process, thanks to the Democratic majority in the Senate.
This extraordinary display of intra-party ineptitude certainly contributed to the Republican resolve to fight Obama tooth and nail over the budget and debt ceiling.
That ongoing fight has resulted in the “shutdown” of (small) parts of the US government and threatens a far more disastrous outcome of a technical US default on its debt later this month. In the end, the doomsday scenario will be avoided because, with approval of Congress down to 5 percent and with 60% of poll respondents blaming the Republicans for what is happening, the sense of self-preservation of the sane majority of Congresspersons of both parties will generate a belated compromise agreement.
Nevertheless, it is abundantly clear that the degree of political and governmental dysfunction in the US is rapidly rising. If the country involved was Macedonia, or even New Zealand, its political circus would be a source of amusement for outsiders. Unfortunately, however, this theater of the political absurd is running in Washington, DC, and the country in question is the United States. There are, therefore, no outsiders. Every other country in the world is impacted by the American shenanigans.
The decline of American military and political power is a source of great concern, especially in Israel. But the damage American weakness is inflicting on the world in general, and on Israel in particular, is by no means limited to the political, diplomatic and military spheres. The monetary policy pursued by the Bernanke Fed over the last five years – of maintaining short-term interest rates at near-zero levels and flooding the financial system with huge amounts of liquidity via successive rounds of “quantitative easing” – has patently failed to get the American economy back on its feet. The supposed recovery is not felt by most ordinary Americans; instead, the benefits from the availability of free money are accruing overwhelmingly to the 1%, mostly the top 0.1%, of the population.
Larry Summers was perceived, rightly or wrongly, as someone who would at least start to wean the economy from the poisonous but highly addictive drug of free money. In fact, Summers is a creature of Wall Street and would likely have done nothing to harm the big banks, with whom he has long been closely associated. And that association is why the Democrats refused to support his candidacy. But Yellen is an extreme monetary dove, a lifelong supporter of government stimulus and therefore the last person ready or willing to even begin to reduce the monetary injection.
This debate over American monetary policy is not arcane or academic. Bernanke’s policies have distorted and subverted not just the American economy and financial system, but those of the entire world. Among the long list of victims is Israel, where the significant achievements of economic policy over 10 or 15 years are being eroded by the collateral damage caused by American policy.
The primary channels of contagion are exchange rates and interest rates, which are themselves closely linked. ZIRP (zero interest rate policy) has weakened the dollar and sent funds flowing into every economy that is performing better than the US and Europe. Israel is one such economy, and these capital flows have pushed the value of the shekel relentlessly higher. That process has eroded the competitiveness of Israeli exports, which have stopped growing in the last two years. The longer this state of affairs continues, the greater the cumulative damage, as more Israeli exporters are forced to relocate overseas, slash costs (read wages or jobs) or close down.
Meanwhile, Israeli interests rates are also forced down by the ZIRPs in force in the US, the UK, Japan and (to a slightly lesser extent) the euro zone. They are at an artificially low level that pushes people to take larger mortgages and to buy more expensive apartments than they would be able to if interest rates were at normal levels.
Sooner or later, this abnormality will correct itself and rates will rise, probably sharply. When that happens, recent apartment buyers will see the value of their homes plummet and their capital wiped out, while their debt remains and carries a much higher rate of interest. The link between Bernanke and the price/affordability of your home, as well as the viability of your job, is clear and much closer than you