BofA Merrill Lynch economist Ethan Harris isn’t buying what he calls ”extreme perma-bear stories” about the U.S. economy. A couple of weeks of disappointing U.S. economic data, culminating in Friday’s weak employment report , revived concerns that the economy was struggling to reach recession escape velocity.

In a research note, Harris said the bad news hasn’t changed his forecast for U.S. economic growth of 3 percent-plus over the next two years. He says the economy has a natural tendency to eventually return to full employment once the “negative shocks” are gone. He points to six major economic theories to support his view, including Keynesian, the Austrian school, and the “financial accelerator model,” which counts Federal Reserve Chairman Ben Bernanke among its advocates. 

But he acknowledges there is one well-known economic theory which does not support his forecast:

“The one notable exception to this view is Marxism. In Marxist theory the capitalist world is doomed to ever worsening cycles of boom and bust, culminating in its collapse and the assent of communism. Needless to say, we do not ascribe to this view.”

U.S. Representative Barney Frank forgot one minor little detail in Thursday’s hearing on overhauling the financial regulatory system — the witness, Federal Reserve Chairman Ben Bernanke.

After Frank and other members of Congress delivered opening statements, Frank launched into a spirited rebuttal of one member’s comments, but was soon interrupted by the committee’s top-ranking Republican, Spencer Bachus.

Bachus: Mr. Chairman, uh, your time has expired. Now if you want to give an additional….

Frank: Excuse me, I’m in my five questions, I’m in my five minutes.

Bachus: How about the opening statement of Chairman Bernanke?

Frank: Oh, I forgot about that. I apologize.

After Bernanke read his statement, Frank offered another apology — and docked himself 30 seconds of speaking time.

Two days after arriving in Martha's Vineyard, President Barack Obama is taking a break from his vacation to make some news: he will announce that he is nominating Ben Bernanke to a second term as chairman of the Federal Reserve.

Investors have given Bernanke, whose current term expires on Jan. 31, 2010, high marks and had widely expected his reappointment.

But the announcement is being made earlier than expected and comes not just during Obama's family vacation but also on the day that the White House Office of Management and Budget and the non-partisan Congressional Budget Office both release their midyear budget updates.

The reports are expected to show the government will spend a record $1.6 trillion more than it collects this year and nearly double its outstanding debt over the next 10 years.

The grim fiscal picture could provide fodder for opponents of Obama's costly plan to overhaul the healthcare system.

So why is Obama interrupting his vacation to announce Bernanke's renomination? Does he hope to inject a sense of continuity and stability by erasing doubt over who might lead the Fed?

For more Reuters political news, click here.

Photo credit: REUTERS/Jason Reed (Obama and friend Eric Whitaker wave as they golf on Martha's Vineyard)

Dallas Federal Reserve President Richard Fisher at first voted against the Fed’s Dec. 16 decision to aggressively chop benchmark interest rates to near zero, but reversed his decision during a lunch break shortly afterward, a book about the Fed slated for August publication reveals.

“I felt after going for a walk down the hall that I didn’t want to pull the legs out from under Ben, and I didn’t want to be perceived as not being a team player,” Fisher says in David Wessel’s “In Fed We Trust,” an inside look at the Fed’s reaction to the financial crisis that exploded in the summer of 2007.

The Fed’s policy-setting Federal Open Market Committee decided to cut rates by almost a full percentage point, an unusually large cut, to fight back hard against a darkening outlook for the economy, which was in desperate condition after the Lehman Brothers failure and the spreading contagion of soured credits.  Fisher, who had dissented four times that year (including once when he thought the Fed should raise rates to quell inflation worries), at first felt that another move down wouldn’t help the economy and would in fact hurt struggling banks’ profits and people who lived on interest from their savings, and voted against the rate cut before changing his mind.

Ironically, Bernanke had been more worried that another Fed official — the reliably hawkish Philadelphia Fed President Charles Plosser — would dissent, and lobbied him before and during the meeting, arguing the Fed needed to maintain a united front during a time of crisis. Plosser backed the rate cut too.

(Photo of Richard Fisher delivering a lecture at Harvard University, Feb. 23. Reuters/Brian Snyder)

You’ve heard of Helicopter Ben Bernanke. What about Bazooka Ben? Barclays Capital strategist Michael Pond thinks it’s time for the Federal Reserve to pull out the really big guns and announce it will buy $1 trillion in U.S. Treasury debt in order to counteract a recent jump in Treasury and mortgage interest rates.

The Fed has already said it would buy up to $300 billion, but this week’s bond market drama suggests that investors are beginning to worry that this isn’t enough.

“We tongue-in-cheek believe that the Fed needs to take the approach from former Treasury Secretary Paulson’s quote at a July 15 Senate Banking Committee meeting that ‘if you have a bazooka in your pocket and people know it, you probably won’t have to use it,’” Pond wrote in a note to clients. “While this didn’t work for Secretary Paulson, as he eventually had to use that bazooka and more, the Fed should try to come up with a big enough number that the threat of that purchasing power alone will be enough to keep rates low. For now, we believe that number is $1 trillion and recommend that the Fed make an announcement soon, rather than wait for its June 24 meeting.”  

What’s your take? Time to bring out the big guns or has the Fed printed enough money already ?

They won't stay dead!

Members of the U.S. Senate grilled Federal Reserve Chairman Ben Bernanke on Tuesday on whether the next gruesome episode in the U.S. economic horror show could include an appearance of “zombie” banks. 

During Japan’s economic stagnation in the 1990s, the government propped up failing banks and firms that came to be known as zombies.  The failure to let such institutions expire prolonged Japan’s agony, many analysts believe.

Now that the U.S. government is struggling to keep the banking system alive, Senator Bob Corker worried aloud that the government is propping up banks that deserve to die.

“It seems to me that -- that this has been creating this sort of dead man walking sort of zombie-like banking scenario,” Corker said at a hearing with Bernanke. “It seems to me that what you have explained is a creeping -- a creeping nationalism of our banks.  I mean in essence, many of them don't have appropriate capital.”

Banks which the government determines don’t hold adequate capital will receive public funding to meet that capital requirement just to keep them going, he argued.

Bernanke sought to calm fears that government efforts to resuscitate the banking system would create ghouls of the sort featured in the 1968 horror film, “Night of the Living Dead.” In that movie, which was shot in rural Pennsylvania, recently dead people are mysteriously reanimated and go on a macabre rampage.

"I think zombie was not an appropriate description of any of the banks,” the Fed chairman said. “I think they all have substantial franchise value, they are all lending, they're all active, they have substantial international franchise.”

Even as the government puts capital into struggling banks to help them lend, it will pressure them to restore themselves to profitability and draw private capital, he said.

Photo credit: Reuters/Jonathan Ernst (Fed Chairman Bernanke at Senate banking hearing)

Governments threatening to cap the pay of bank bosses in the wake of the financial market crisis might be better off linking their earnings to the more humble salaries of the central bankers now cleaning up the mess.

Politicians from Berlin to Canberra are up in arms about the multi-million dollar bonuses and lavish perks earned by bank executives now that the high-risk debt they allowed to proliferate has brought the global financial system to its knees and forced taxpayers to pledge an estimated $3.2 trillion to fix the mess.

Germany plans to block access to its bank rescue scheme to banks whose executives earn more than 500,000 euros ($673,800) a year — more than the amount earned by the world’s top two central bankers put together.

U.S. Federal Reserve chief Ben Bernanke’s $191,300 a year looks like loose change when compared with $22 million bonus pocketed by Lehman’s fallen head Dick Fuld in March or the 14 million euros earned by Deutsche Bank CEO Josef Ackermann last year, even if he and the rest of the Deutsche Bank management team are foregoing their bonuses this time around as a mark of respect.

European Central Bank chief Jean-Claude Trichet is only slightly better off with 345,252 euros a year. Bank of England governor Mervyn King earns a mere 275,340 pounds a year or roughly 355,000 euros, while the 35.78 million yen salary of Bank of Japan Governor Masaaki Shirakawa is worth about 265,400 euros.

Democratic presidential nominee Barack Obama and Republican nominee John McCain meet tonight at Hofstra University in New York, their final scheduled appearance together before election day.

The third encounter was meant to be the debate to focus the economy and domestic issues. But the economy couldn’t wait.

The $700 billion government bailout was the first topic at the almost-didn’t-happen-first-debate with PBS moderator Jim Lehrer.

Tom Brokaw of NBC News selected his first question from Allen Shaffer, who asked about on the economic downturn and retirees at the Town Hall meeting.

CBS anchor Bob Schieffer moderates tonight’s debate, hours after the Dow Jones Industrial Average and the benchmark S&P 500 suffered their worst one-day percentage drops since the 1987 stock market crash .

And Federal Reserve Board Chairman Ben Bernanke told a group of economists in New York that policymakers may need to use their regulatory authorities to predict and curtail asset bubbles in the future so that we don’t see such wild swings in the economy.

What would you ask if you were in Schieffer’s seat?

The conference table is set for the G7 finance ministers and central bank governors meeting in the U.S. Treasury’s marbled and gilded Cash Room.
    But it looks more like a G8 gathering.
    There are three spaces at the far western end with name cards for Russians: Finance Minster Alexei Kudrin, Deputy Finance Minister Dmitry Pankin, and central bank chairman Sergei Ignatyev. Russian officials were invited to participate in an “outreach dinner” on Friday night that will focus on bank failures and rescues.
    U.S. Treasury Secretary Henry Paulson is to be seated at the center of the table draped in white, made up portable sections set in a rectangular arrangement.
    Flanking him will be Fed Chairman Ben Bernanke on his right and Treasury Undersecretary for International Affairs David McCormick on his left.
    Counterclockwise from Bernanke will be:
    Canadian Associate Deputy Finance Minister Tiff Macklem
    Canadian Finance Minister Jim Flaherty
    Bank of Canada Governor Mark Carney
    World Bank President Robert Zoellick
    European Central Bank President Jean-Claude Trichet
    Paris Club Chairman Xavier Musca
    French Economy Minister Christine Lagarde
    Bank of France Governor Christian Noyer
    German Deputy Finance Minster Rolf Wenzel     
    German Finance Minister Peer Steinbrueck
    Bundesbank President Axel Weber
    Italian Treasury Director General Vittorio Grilli
    Italian Economy Minster Giulio Tremonti
    Bank of Italy Governor Mario Draghi
    Japanese Vice Finance Minister Naoyuki Shinohara
    Japanese Finance Minister Shoichi Nakagawa
    Bank of Japan Governor Masaaki Shirakawa
    IMF Managing Director Dominque Strauss-Kahn
    EU Monetary Affairs Commissioner Joaquin Almunia
    European Commission Deputy Managing Director Marco Buti
    Kudrin
    Pankin
    Ignatyev
    British Treasury International and Finance Directorate interim head Stephen Pickford
    British Chancellor of the Exchequer Alistair Darling
    Bank of England Governor Mervyn King
    McCormick
    Paulson
 
    The Cash Room once served as a banking hall where the public could cash government checks, sell U.S. Treasury bonds and redeem their gold and silver certificates for bullion. Its first public function was the inaugural reception for President Ulysses Grant in 1869.
 
 (Writing and reporting by David Lawder)