The US consumer has been hit by a triple whammy:falling home prices, rising food and energy costs which reduce real income and a credit squeeze which has reduced spending.It has all added up to a vicious downward spiral which threatens to put the US into recession.
Greenspan kept interest rates too low for too long which fueled a runaway boom in real estate and commodity prices.Bernanke, bent upon keeping inflation low, kept interest rates too high for too long, which is the main reason behind the present crisis.
Now, in an election year, all talk of containing inflation has been thrown out of the window as the Fed battles to prevent a recession.Warren Buffet said yesterday that he feels the US is already in recession.The Fed however remains confident that it will avoid one. This assessment is backed by the International Monetary Fund. These authorities have forecast a very low growth rate in the first half of the year, with growth rebounding in the second half.
Bernanke is now urging banks and other lenders to help people avoid foreclosure even at the cost of writing down some of the principal. He argues that it may be cheaper for the banks to do so, given the high cost of enforcing foreclosure and of selling a repossessed property.
At the root of all these problems is undoubtedly the policy of reckless outsourcing promoted by the government over the last decade.Millions of steady long term jobs have been shifted overseas.In theory this loss should have been made good by an increased demand for high value goods from the US. This has not increased as much as anticipated, partly because of restrictions on export of hi-tech goods to many countries, including China. All this has put a cap on US exports unless the dollar falls further.
All eyes are now on the next Fed meet on March 18th, when another rate cut is expected. Bernanke has already signaled as much.Outsourcing is already an election issue, with the Democrats promising strong action. Hopefully better days lie ahead.