Financial Watch

Last week President Bush announced Ben Bernanke would replace Alan Greenspan as Chairman of the Federal Reserve Bank next January. Greenspan leaves behind a strong legacy. He will most be remembered for leading the nation’s longest economic expansion during the 1990’s and for aggressively reinvigorating growth following the dot-com collapse. Greenspan deserves large credit for his management following the collapse of Long Term Capital Management and the 1987 stock market crash. In both instances quick action to provide increased liquidity to the financial markets prevented these crisis from inflicting serious damage on the U.S. economy.

Despite the legacy Alan Greenspan has earned within the banking and finance industry, his successor will be forced to solve several critical headwinds hanging over the U.S. economy. The most significant headwind is a massive current account deficit. Asian nations continue to rely on undervalued currencies to keep their economy’s running. This situation will inevitable reverse in time. A major question facing Ben Bernanke is whether he believes this massive imbalance can correct itself in time or will the U.S. and world economies need to go through a major shock to bring the current account back into balance. Ben Bernanke will also need to address a cooling housing market and the future direction of interest rates. Financial Watch has argued throughout most of the year that we would see evidence of a housing bubble emerge in the late fall/early winter as rising interest rates increased borrowing costs for prospective homeowners. The signs of a cooling housing market is evident across the United States, but we are not yet at the point of clearly recognizing a tipping point in housing prices. It will be interesting to see how Bernanke responds to a slowing economy when he assumes Alan Greenspan’s position early next year.