By ANN McFEATTERS
Irrational exuberance has fled. Cautious pessimism is back.
When former Federal Reserve Board chairman Alan Greenspan warned Americans some time ago that what goes up also comes down (high-fliers on the stock market), he made headlines. The avuncular guy who turned the economic wheel and made us feel better about our money for two decades was worried about the long term.
Now we have a new man with his finger on our economic pulse, Ben Bernanke, who just gave the nation a much-awaited report on the country’s fiscal health.
He said that despite fearsomely high oil prices that are being passed on to consumers in nearly every venue, he’s optimistic the nation will control the inflationary spiral that seems to some to be inevitable.
He also said that economic growth in the United States seems to be slowing.
Stock markets were reassured. The public was confused. So far Bernanke, who’s new on the job, has had a confusing start. Earlier this year he befuddled Wall Street when he made an off-hand statement that he was no dove when it came to inflation.
Now comes an upbeat Bernanke to reassure us. Even though what’s called "core" inflation is worrisomely high, energy prices are soaring and another dot-com bust seems in the making, Bernanke suggests the Fed won’t need to push interest rates too much higher because inflation is less of a threat than it appeared to be a short time ago. He says the cooling housing market isn’t a major worry.
On the other hand, there could always be a major change and, thus, the nation’s top economic forecaster warns us he’s really not predicting anything and that the Fed plans to sit back and watch for awhile. That’s known in Washington as being flexible. (Others might say it’s hedging one’s bets.)
The truth is that everyone has his (her) fingers crossed, and nobody knows what will happen to the economy. If the nascent Middle East war drives the price of oil toward $100 a barrel, which is no longer inconceivable, America will be in deep economic trouble. The price of a barrel of oil already has doubled in just two years. It helped prompt the Fed to raise interest rates 17 times from 1 percent to 5.25 percent.
When the economy slows, people lose jobs. That cuts demand for goods and services. Inflation slows. That’s good for some households _ and desirable from the Fed’s point of view, but it’s certainly not good news for those households with unemployed workers.
Despite Bernanke’s surprisingly optimistic take on the economy, there are plenty of summer signals that should be giving Americans tingles of alarm. Housing and construction starts are down although housing prices are high. Car sales are tepid. Consumers are wary of spending.
Every day brings new reports of job cutbacks. Congress has stalled on immigration reform and is still fiddling with pension reform, meaning pensions are still in jeopardy and uncertainty about the fate of illegal immigrants remains high. The courts are holding, so far, that giants such as Wal-Mart don’t have to provide health insurance to their legions of employees. Workers are not getting significant wage increases despite high corporate profits. The poor are poorer; the rich are richer.
Asked why companies aren’t passing profits on to workers, Bernanke said he hopes that will happen. "I’m a little surprised they (wages) haven’t risen more already," he said. Not reassuring.
The truth is that economic forecasting is a game. Economists study what the economy has done and project what it should do but it often doesn’t do that. We’re more dependent than ever before on what China does, what happens in the Middle East, what the thinking is in European capitals.
Wall Street flies over to one side of the boat depending what the Fed chairman, whoever he (so far not she) is, and then to the other side of the boat a week later.
The American people are steadier. Despite President Bush’s ebullient insistence that the economy is thriving, the Fed’s reassurance and the market’s weird gyrations, people sense we’re in for tough times. Too many of us have not saved enough money to weather a serious downturn (because corporate American wants us to buy, not save).
It’s too soon to tell if Bernanke, a theoretician, will be a good Fed chair or not. It’s a no-win job _ he must reassure without being unrealistic. If the Fed pushes rates too high, the economy dives. If it does too little, inflation strengthens.
Six months into the job, Bernanke indicates he will be unusually open about the Fed’s policy-making _ a good sign. We need to make the economy less mysterious.
We also need a steady (and flexible) chairman. We need someone who tells us the truth, even when it hurts. Here’s predicting the next time Bernanke talks, it may hurt.
(Scripps Howard columnist Ann McFeatters has covered the White House and national politics since 1986. E-mail amcfeatters(at)nationalpress.com.)