Sunday, Federal Reserve Chairman Ben Bernanke sat down with 60 Minutes correspondent Scott Pelley for an interview on the state of the American economy.

The interview was notable for two reasons – first, because interviews with the Chairman of the Fed were until now almost unheard of, and second, because Bernanke told 25 million viewers that we could see the recession end this year.

“We’ll see the recession coming to an end probably this year. We’ll see recovery beginning next year. And it will pick up steam over time,” he told Pelley.

But Bernanke was quick to qualify his projections: “We won’t be back to full employment. But we will see, I hope, the end of these declines that have been so strong in a last couple of quarters.”

Those are strong words for anyone who sits in Washington’s inner circle, but it’s important to remember that Bernanke hasn’t been a Washingtonian for long. And despite allegations that he’s been too generous with the financial industry, Wall Street is equally as foreign to him.

Bernanke spent the majority of his professional career as an academic, first as a professor at Stanford, NYU and MIT, then as the Chair of Princeton’s Economics Department.

During the interview, 60 Minutes stressed Bernanke’s small-town upbringing. They reminded America that Dr. Ben Bernanke, PhD grew up in the middle class in Dillion, South Carolina. And with no shortage of made-for-TV irony, the cameras met with Bernanke at his childhood home in Dillon, a rancher that’s in foreclosure because the current owners couldn’t make the payments.

But frills aside, what Bernanke said last Sunday night was important for investors to remember.

He pointed out that we’re not going to see any sort of an economic recovery until the financial system gets itself in order. While that doesn’t mean that the stock market has to make sense again, it does mean that our nation’s banks have to get their acts together before things get straightened out.

“The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We’ve seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we’re not gonna see recovery. But we do have a plan,” he said.

One of the biggest elements of that plan is the “Bernanke Doctrine,” which Chairman Bernanke laid out right after he was sworn in as Fed Chairman back in 2002. In his seven-tiered plan, Bernanke emphasizes a systematic approach to avoiding deflation – one of the biggest concerns that we could face in a recession.

At present, the Bernanke Doctrine is in full effect, and as a result, we’re actually seeing modest inflation right now – up 0.4% in February according to Department of Labor numbers released today. Among other things, that small amount of inflation means that consumers aren’t being pressured by a lack of liquidity in the money supply.

If Bernanke has been this sharp so far on deflation, maybe his seemingly optimistic predictions aren’t so off-the-wall. After all, who has a better pulse on the economy than our nation’s chief economist?

As economic fundamentals begin to show themselves in the coming months, we’ll see if Ben’s hypothesis holds up.

Cheers,
Jonas Elmerraji

March 18, 2009

Jonas Elmerraji

A big-four public accounting alum, Jonas Elmerraji brings his readers extensive expertise in small-cap stocks and broad market moves. Elmerraji’s interest in the market started with an investing course in elementary school – today he holds a degree in financial economics from UMBC and specializes in blending fundamental and technical analysis. Elmerraji has contributed to Forbes, TheStreet.com, and Investors Business Daily among others. He is managing editor of the Penny Momentum Trader, and a co-editor of Penny Stock Fortunes.

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