City Eye: Bernanke's reserve is a message of hope

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The Independent Online

And so to Washington DC, drawn there by a talking shop. Along with the talking, there was ample opportunity for walking. The Lincoln Memorial is always a moving place to see; the US Fed, a few hundred yards away, always chilling.

The Fed is headquartered in a giant, white Corinthian temple which exudes an aura of implacability and icy calm. I'm not sure, though, whether the Fed really always does what it says on the column. This is not just because of some hair-raising episodes recalled by former chairman Alan Greenspan, whose memoir, The Age of Turbulence, is a salutary read for anyone who thinks they can handle a financial crisis.

One imagines that Greenspan's successor, Ben Bernanke, knows some of the scarier passages by heart. He also seems to have taken on board some of Greenspan's methods. He has kept a low profile since coming into office and seems happy to let Greenspan continue to be idolised by equity and currency markets.

But there's a but. The markets will no longer roll over and pee in the air with pleasure at a favourable Greenspan pronouncement. Bernanke is the man. So the question is, how does he deliver a message to the markets while avoiding the limelight?

Incidentally, it is encouraging that Bernanke wants to stay away from centre-stage. This is an indication that the strength of the current storm isn't even six on the Beaufort scale. The thinking from the Greenspan school of chairmanship is to husband the power of the word. In the crazy currency markets of the 1980s, central banks saved a fortune by saying little and letting currency traders spook themselves in an ever-more elaborate game of bluff. If the authorities were too specific, for example saying they would intervene to defend a certain cross-rate, the markets took it as a challenge and milked the banks of the reserves they knew would be pumped into the market. Hence George Soros's billion-quid looting of the Bank of England's coffers.

So Bernanke is getting the message out via his mates. Frederic Mishkin is the newest Federal Reserve governor. A former professor at Columbia University, he is an old buddy of Bernanke's. The two were graduate students at the Massachusetts Institute of Technology and worked together on several projects. So it's worth paying attention to what the voluble Mishkin says. And it's not good news for those who side with French President Nicolas Sarkozy, who criticised US authorities for allowing the dollar to slide.

But the message from Mishkin – and therefore, Bernanke – is clear. US interest rates will be kept low for the foreseeable future. More than that, any changes will be downwards. Mishkin's argument, presented in conference papers and in at least two speeches, is that financial instability wreaks havoc. It's simple, but immaculately researched stuff: falling house prices have a direct impact on spending, and if you mess with that in a demand-led economy, you tamper with the foundations of the economy itself.

So the message is clear. The rest of the world will continue to get cheap dollar-priced products. Domestic US demand will be protected at all costs, and the weakness of the dollar, and the unhappiness of the lauded Sarkozy, be damned. But it may be too little, too late. If it doesn't work, Bernanke will make these pronouncements himself.

Immigration fatigue

Back in the UK, I found myself talking about the Problem That Dare Not Speak Its Name: the real population of the UK. I'm a bit bored of it now, so here's my last word: the Government knows there's a problem. That's the real reason for all the frantic plans to refurbish existing housing stock. They're working on a solution, but not admitting to the problem.