The National 2008-07-15 10:00:38
From equidistant cities separated as much by politics and culture as by oceans and land masses, Ben Bernanke and Zhou Xiaochuan work opposite ends of a labyrinthian street. As the heads of the world’s two most influential central banks – the US Federal Reserve and the People’s Bank of China – they must navigate their way through a jungle of vertiginous risk and forbidding uncertainty. They have been attacked as either too cautious or too aggressive, too corporatist or too populist. Both men are haunted by inflation, and in a measure of the shifting global economy, Mr Zhou is having better luck slaying his dragons than the besieged Mr Bernanke.
In many ways the world’s largest and fourth-largest economies are mirror images of each other – high-growth China as yin to a languishing American yang. In America, rising prices are a by-product of a weak dollar; Chinese inflation, meanwhile, is largely demand-driven, a consequence of higher wages due to a tightening labour pool and the worker-friendly demands of a new labour law. Since peaking at nearly nine per cent in February, its highest level in 11 years, the country’s consumer price index has retreated slightly due to the steady appreciation of the Chinese yuan.
Although nothing in China happens without thorough and quiet deliberation by Communist Party cadres – Beijing’s cult of personality was buried with Mao – no one is more closely associated with the yuan’s rise than Mr Zhou. A 60-year-old economist who assumed the helm at the central bank in 2002, Mr Zhou is as colourful as Chinese commissars get; he has barnstormed the countryside to promote everything from outbound retail investment – tens of billions of dollars in Chinese savings have been invested in foreign markets in the past year – to a reining in of currency speculation. He has been criticised for being too “Westernised” by Beijing’s old guard and he has antagonised exporters, a powerful constituency, with his support for a strong currency. As late as last autumn, Mr Zhou’s strong yuan policy was considered radical, if not heretical. Today, it is applauded for being a cooling agent for an overheated economy, without hurting export growth; in the first quarter of this year the value of Chinese-made goods sold abroad grew by 11 per cent while the economy grew by just more than 10 per cent.
Things have not turned out so well for Mr Bernanke, who had his defining moment just under a year ago. In August, having outraged Wall Street by refusing to lower interest rates in the face of weak demand, the Fed chairman reversed course only a few days later by cutting the rate at which the Fed lends money to commercial banks. The move was welcomed by investors but condemned by arch monetarists, who believe expanding the money supply is inherently inflationary. Further interest rate cuts followed, and persistent inflation together with slow growth has raised the spectre of 1970s-style stagflation.
The 54-year-old Mr Bernanke, who replaced the legendary Alan Greenspan as the Fed chairman in February 2006, holds a PhD in economics from MIT and has co-authored a highly praised macro-economic textbook. As a professor of economics at Princeton in 2000, he identified illiquidity as the prime culprit behind the Great Depression. (Somewhat ominously, Mr Bernanke describes himself as “a Great Depression buff, the way some people are [American] Civil War buffs”.) His easy credit policies may be vindicated, just as Keynesianism is widely credited with having reversed the depression of the 1930s, along with the industrial mobilisation that followed America’s entry into the Second World War.
This seems unlikely, however, though not necessarily because of policies inspired by Mr Bernanke. Unlike Mr Zhou, who operates in a hugely liquid economy, with US$1.4 trillion (Dh5.1 trillion) in foreign exchange and a vast ocean of unreported household savings, prolific manufacturers and $83bn in annual direct foreign investment, Mr Bernanke has few cards to play. He inherited from Mr Greenspan a highly leveraged economy entering the twilight of an asset bubble that burst just as he was settling into the job. Had he resisted pressure to lower credit rates, demand would have shrivelled further and the economy may well have entered a recession. It might still.
Having bailed out Wall Street with emergency credit along with the $29bn rescue of Bear Stearns, Mr Bernanke now faces the possible collapse of America’s two state-sponsored mortgage financiers. Share prices are at 2000 levels, the outlook for the dollar is bleak and the age of cheap oil, the drug of choice for the American consumer, is no longer on offer. As the Bush administration enters its own twilight, America faces a raft of “least bad” options, from the economy to the war on Iraq. Historians may record this era of American power as “The Denouement”.
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The National 2008-07-15 10:00:38