Federal Reserve chairman Ben S. Bernanke is holding to his relatively rosy predictions about the economy. He told members of the House Budget Committee last week about signs of stability in the housing market and in consumer spending, and a healthier picture for business inventories. Yes, the employment numbers look bad, but “we continue to expect overall economic activity to bottom out, and then to turn up later this year,” Bernanke testified. Some financial markets have been improving, inflation isn’t a problem, and the ease with which banks have raised private capital “suggests that investors are gaining greater confidence in the banking system.” So it’s time for Congress to start planning sharp reductions in the federal deficit, which is expected to jump from a pre-financial crisis level of  40 percent of GDP to 70 percent of GDP in 2011.

Timothy A. Canova, professor of international economic law
and associate dean at Chapman University School of Law, says he is “quite skeptical of Ben Bernanke’s optimistic forecasts about the economic recovery. Not only is the U.S. economy continuing to shed jobs, but the percentage of long-term unemployed (for more than 26 weeks) has grown dramatically.” Foreclosures continue to soar, and “commercial real estate and credit card receivables are both in distress.” Canova expects the bankruptcies of General Motors and Chrysler to cost at least 200,000 jobs.

Meanwhile, state and local budget cutbacks continue to sap the jobs market, income levels, aggregate demand, and the real estate sector. The Fed and Treasury “have done little to arrest much of these downward spirals,” says Canova.

German Chancellor Angela Merkel thinks the Fed, the Bank of England, and even the European Central Bank are trying too hard. She criticized in a speech last week the “powers of the Fed” and the actions of the BofE, and charged that the ECB “has also bowed somewhat to international pressure with the purchase of covered bonds.” Merkel called for a resumption of “an independent central-bank policy and to a policy of reason.”

“I was disappointed in Ms. Merkel’s diatribe,” says Canova, who questions “how much independence the Fed has actually surrendered.  Its policy of quantitative easing looks more like easing for its private constituents, such as by purchasing toxic assets, unlocking interbank lending and other credit markets, and liquidity guarantees to AIG and others, but not for the Treasury’s borrowing requirements, [such as] long-term government bond yields have been rising.” Merkel is probably “engaging in election-year politics, and with a highly distorted view of recent monetary history.” Fed policies leading up to the current crisis set up “perhaps the greatest financial bubble and inflation in asset prices in recorded history,” Canova contends.

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