“Ben Bernanke is a guy with guts who has done very good things for the United States,” billionaire investor Warren Buffett recently said about the Chairman of the Federal Reserve. Buffett, known as the Omaha Oracle thanks to his ability to predict the future summed up what many people think on this side of the Atlantic: the true architect of the slow but sustained, US economic recovery, is the central banker by printing money.
So far the FED has launched up to three monetary stimulus plans, called Quantitative Easing, or QE. Since the beginning of the crisis it has almost quadrupled its portfolio up to $3 trillion, which represents almost 20% of the GDP of the United States. Today the central bank keeps the QE3, purchasing $85 billion in bonds or mortgage-backed securities every month. And it has promised to continue doing so until unemployment drops below 6.5%, from the current 7.5%.
With these plans, the FED has killed two birds with one stone. It has pulled billions of dollars in assets out of the banks’ balance sheets, many of them of poor quality, leaving liquidity. That cash, under normal conditions, should end up seeping into the real economy. Besides, this is a way of lowering real interest rates that Americans citizens and companies pay for their loans. As the Federal Reserve already has the reference interest rate in the 0-0.25%, the only way to reduce it even more is to make the raw material, that is, money, more abundant and, therefore, cheaper.
That cheap money is, according to most analysts, behind the uncontested recovery in the housing sector. The actual mortgage interest rate has fallen from 6.5% in the summer of 2008 to 3.5% now. Home prices are growing at a rate of more than 9% yearly, according to S&P Case-Shiller March data. The number of evictions has returned to the level of 2007. With the rise in the value of homes has come the recovery of the families’ wealth. In 2012 it increased by 9%, $1.7 trillion, up to more than 66 billion in total, which is the highest level since 2007. I.e., the purchasing power of households, adjusted for inflation, has returned to pre-crisis levels.
Employment is the other fact steadily improving in the United States. April report has been spectacular: more than 635,000 new jobs created in the last quarter, in spite of the feared cuts plan known as the sequester. Unemployment rate stood at 7.5%, and underemployment (those Americans seeking for a full-time job but who only found minijobs or those who have given up job searching) is of 13.8%. In addition, there are fewer long-term unemployed people, 4.4 million today, of a total 11.7 million people.
How much does the Government of Barack Obama have to do with US economic recovery? Very little, actually, since they their hands are tied by Congress. It had a more active role in the initial recovery, indeed, with their almost-a-trillion-dollar plan.
So Bernanke is perhaps one of the most important political factors behind the slow but steady recovery of the real US economy, which is growing at a 2.5% pace a year despite Europe’s recession -its main partner-, and China’s slowdown. Bernanke, moreover – and here comes one of the problems–could be behind the crazy Wall Street rally. Both the Dow Jones and SP are still breaking historical and symbolic records: the first is flirting with 15,000 points, and the second, above the 1,600. Although when adjusted to inflation this is not the higher value of the stock market, many investors are wondering whether there could be another bubble due to all this free money injected by the FED.