Bernanke Takes Off the Gloves After Becoming Global Target

You could call it Ben Bernanke's, "Speak softly and carry a big stick" speech.

Federal Reserve Bank Chairman Ben Bernanke
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Federal Reserve Bank Chairman Ben Bernanke

The Fed Chairman known as a student of the Great Depression, may have taken a page out of President Teddy Roosevelt's foreign-policy manual Friday when he responded to foreign critics of his controversial monetary easing strategy and reminded them how important a healthy U.S. economy is to world trade.

"The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth ... in the United States," Bernanke said in a speech to a conference at the European Central Bank in Frankfurt.

In one fell swoop, Bernanke rejected criticism that theso-called QE2 policy was meant to weaken the dollarand that the U.S. was acting only out of self interest.

"What he's saying is there is no conflict," says Ram Bhagavatula, managing director at the hedge fund Combinatorics Capital. "Even if it causes the dollar to go down in the short term everyone should like it because in the medium term growth goes up."

"A strong US economyis in everyone’s interests and a strong economy should make the dollar strong not weak," adds Robert Brusca, chief economist at Fact & Opinion Economics

Economists say Bernanke's speech appeared to be both a lesson in the complicated realities of an unstable global economy and a rebalancing of world trade flows.

In referring to countries intent on keeping their currencies undervalued to drive export-focused economies partly because of weak domestic demand, analysts say Bernanke could have been citing Germany as much as China.

"Germany isn't a model for the rest of the world," says Brusca. "Instead of providing help, it's making things worse, by simply growing its economy through exports."

In referring to the two-speed economic recovery, wherein emerging markets have enjoyed solid recoveries while developed nations have stumbled along, Bernanke was making it clear that the situation was essentially flawed and ultimately unsustainable.

"The U.S. has to get its deficit down,and the way you do that is through a lower dollar," says Dean Baker, co-director of the Center for Economic and Policy Research. "It's a perverse situation. The U.S. should not have these trade imbalances. They've gotten dependent on us."

The timing and power of Bernanke's speech, though as well received as it was well-constructed, also suggests the Fed was tired of being on the defensive, especially after a G20 meeting, where the U.S. was widely criticized.

"The Fed was surprised by the negative reaction to its second round," says long-time Fed watcher David Jones of DMJ Advisors. "I also don't think they expected the foreign criticism—by central bankers as well as finance ministers."

Those critics had been pursuing their own national remedies, whether it was intervening in the currency markets or promoting fiscal austerity programs to amid a sovereign debt crises.

"Every country is trying to fix its own problems irrespective of the consequences for everyone else," says Bhagavatula.

Bernanke's speech began and ended on that theme.

"It would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy," he said, and "provide more effective checks on the tendency for countries to run large and persistent external imbalances, whether surpluses or deficits."

For Bernanke, sooner is clearly better.