OLD MODEL NOT WAY OUT FOR CRISIS-STRICKEN US

       Living beyond their means caused the current situation and there's no strong policy answer A year ago, as the US financial system was about to collapse into a systemic crises, Ben Bernanke stepped in with the biggest bail-out ever. The federal money has helped to stop the bleeding among the US financial institutions. But the financial bubbles have burst. So far he has racked up the Federal Reserve's balance sheet by more than US$2 trillion. And this year, Bernanke also plans to use another $1.75 trillion to purchase government debt and corporate instruments in order to keep the system alive.
       On the one hand, Bernanke's action has won praise. Without the Fed's intervention, the US financial system would have melted down beyond any salvage. The meltdown in the US would also have brought the global economy to a grinding halt. The federal money is acting like an artificial heart replacing the failed heart in the US financial system. Bernanke's strategy is to restore the health of the US banks so they can lend money to corporates or the consumers again to jump-start an economic recovery. Many believe that the worst of the financial crisis is over. The contentious point is how long will it take for the economic recovery to come to pass.
       But critics of the Federal Reserve are alarmed by Bernanke's intervention. The federal money injected into the financial system is laced with hidden political agenda. From the outset, the financiers or Wall Street bankers were spared any punishment for their blunders. The Obama administration appears to be managing economic and financial policy with the interest of Wall Street as top priority. Banks were not treated equally when it came to federal assistance. Much worse, the intervention has prevented the US banks or companies from undergoing a restructuring and weeding off their excesses. Without restructuring, chances of a US recovery are slim.
       How can the US expect the economy to recover by throwing good money after bad money and expect the Americans to start consuming again when they are already saddled with debt? It is strange that US policy-makers are unable to come to grips with the reality they are confronting. The US cannot continue consuming beyond its means. It is now time to pay the bill. But the policy drive of the Obama administration is to continue the same old model that caused the US crisis in the first place - excessive consumption, excessive borrowing at all levels and financial bubbles.
       Last week Warren Buffet wrote an opinion piece in the New York Times. Buffet, the world's most respected investor, cranked up some unpleasant facts. First, the US Congress is now spending 185 per cent of what it takes in. Second, the US deficit is a post-World War II record of 13 per cent of gross domestic product. Third, America 's debt is growing by 1 per cent a month. Fourth, the US needs to borrow at least $1.8 trillion a year to fill up the big hole in the budget.
       To finance the $1.8-trillion budget deficit is already a big problem. Buffet said even if the Chinese were to lend the US $400 billion a year and the Americans save $500 billion a year and lend to the US government, the Congress would still need another $900 billion. So where's the money going to come from? The answer is that the Federal Reserve would have to print money to cover the deficit. Investors world-wide and sovereign governments, who have invested in US treasuries, can see the figures. And they are not happy with what they see. If the Federal Reserve prints too much money, it will debase or destroy the value of the US dollar. For this reason, investors and governments are looking at ways to diversify their investment from US dollar-denominated assets.
       Bernanke is facing a "damn if I do and damn if I don't" dilemma. He is already on the tiger's back. The US system requires even more federal money going forward when investors are not willing to lend to the US any more. There is no strong policy agenda to reduce the consumption and the debt load in the US. If this situation continues and Bernanke is forced to turn to the printing press time and again, soon confidence in the US leadership will evaporate. Between now and the end of this year, it will be a big challenge for US policy-makers to hold the system intact.