G
Gandalf Grey
Guest
Bernanke's State of the Economy Speech: "You are all Dead Ducks"
By Mike Whitney
Created Feb 19 2008 - 1:14pm
Even veteran Fed-watchers were caught off-guard by Chairman Bernanke's
performance before the Senate Banking Committee on Thursday. Bernanke was
expected to make routine comments on the state of the economy but, instead,
delivered a 45-minute sermon detailing the afflictions of the foundering
financial system. The Senate chamber was stone-silent throughout. The
gravity of the situation is finally beginning to sink in.
For the most part, the pedantic Bernanke looked uneasy; alternately biting
his lower lip or staring ahead blankly like a man who just watched his
poodle get run over by a Mack truck. As it turns out, Bernanke has plenty to
worry about, too. Consumer confidence has dropped to levels not seen since
the 1970s recession, real estate has gone off a cliff, credit-brushfires are
breaking out everywhere, and the stock market continues to gyrate
erratically. No wonder the Fed-chief looked more like a deck-hand on the
Lusitania than the monetary-czar of the most powerful country on earth.
Bernanke's prepared remarks were delivered with the solemnity of a priest
performing Vespers. But he was clear, unlike his predecessor, Greenspan, who
loved speaking in hieroglyphics.
Bernanke:
As you know, financial markets in the United States and in a number of other
industrialized countries have been under considerable strain since late last
summer. Heightened investor concerns about the credit quality of mortgages,
especially subprime mortgages with adjustable interest rates, triggered the
financial turmoil. However, other factors, including a broader retrenchment
in the willingness of investors to bear risk, difficulties in valuing
complex or illiquid financial products, uncertainties about the exposures of
major financial institutions to credit losses, and concerns about the weaker
outlook for the economy, have also roiled the financial markets in recent
months."
Yes, of course. The banks are ailing from their subprime investments while
Europe is sinking fast from $500 billion in unsellable asset-backed garbage.
The whole system is clogged with crappy paper and deteriorating collateral.
Now there are problems popping up in auction rate sales and the
normally-safe municipal bonds. The whole financial Tower of Babel is
cracking at the foundation.
Bernanke continues:
Money center banks and other large financial institutions have come under
significant pressure to take onto their own balance sheets the assets of
some of the off-balance-sheet investment vehicles that they had sponsored.
Bank balance sheets have swollen further as a consequence of the sharp
reduction in investor willingness to buy securitized credits, which has
forced banks to retain a substantially higher share of previously committed
and new loans in their own portfolios. Banks have also reported large
losses, reflecting marked declines in the market prices of mortgages and
other assets that they hold. Recently, deterioration in the financial
condition of some bond insurers has led some commercial and investment banks
to take further markdowns and has added to strains in the financial markets.
Bernanke sounds more like an Old Testament prophet reading passages from the
Book of Revelations than a Central Banker. But what he says is true; even
without the hair-shirt. The humongous losses at the investment banks have
forced them to go trolling for capital in Asia and the Middle East just to
stay afloat. And, when they succeed, they're forced to pay excessively high
rates of interest. The true cost of capital is skyrocketing. That's why the
banks are protecting their liquidity and cutting back on new loans. Most of
the banks have also tightened lending standards which is slowing down the
issuance of credit and threatens to push the economy into a deep recession.
When banks cramp-up, the overall economy shrinks. It's just that simple, no
credit, no growth. Credit is the lubricant that keeps the capitalist
locomotive chugging-along. When it dwindles, the system screeches to a halt.
"DOWNSIDE RISKS TO GROWTH HAVE INCREASED"
Bernanke again:
In part as the result of the developments in financial markets, the outlook
for the economy has worsened in recent months, and the downside risks to
growth have increased. To date, the largest economic effects of the
financial turmoil appear to have been on the housing market, which, as you
know, has deteriorated significantly over the past two years or so. The
virtual shutdown of the subprime mortgage market and a widening of spreads
on jumbo mortgage loans have further reduced the demand for housing, while
foreclosures are adding to the already-elevated inventory of unsold homes.
Further cuts in homebuilding and in related activities are likely....
Conditions in the labor market have also softened. Payroll employment, after
increasing about 95,000 per month on average in the fourth quarter, declined
by an estimated 17,000 jobs in January. Employment in the construction and
manufacturing sectors has continued to fall, while the pace of job gains in
the services industries has slowed. The softer labor market, together with
factors including higher energy prices, lower equity prices, and declining
home values, seem likely to weigh on consumer spending in the near term.
So, let's summarize. The banks are battered by their massive subprime
liabilities. Housing is in the tank. Manufacturing is down. Food and energy
are up. Unemployment is rising. And consumer spending has shriveled to the
size of an acorn. All that's missing is a trumpet blast and the arrival of
the Four Horseman. How is it that Bernanke's economic post-mortem never made
its way into the major media? Is there some reason the real state of the
economy is being concealed from 'we the people'?
Bernanke continues:
On the inflation front, a key development over the past year has been the
steep run-up in the price of oil. Last year, food prices also increased
exceptionally rapidly by recent standards, and the foreign exchange value of
the dollar weakened.... (If) inflation expectations to become unmoored or
for the Fed's inflation-fighting credibility to be eroded could greatly
complicate the task of sustaining price stability and reduce the central
bank's policy flexibility to counter shortfalls in growth in the future.
Right. So, if the Fed's rate-cutting strategy doesn't work and the economic
troubles persist (and prices continue to go through the roof) then we're
S.O.L. (sh out of luck) because the Fed has no more arrows in its quiver.
It's rate cuts or death. Great. So, we can expect Bernanke to hack away at
rates until they're down to 1% or lower (duplicating the downturn in Japan)
hoping that the economy shows some sign of life before it takes two full
wheelbarrows of greenbacks to buy a quart of milk and a few seed-potatoes.
Sounds like a plan!
We don't blame Bernanke. He's been remarkably straightforward from the very
beginning and deserves credit. He's simply left with the thankless task of
mopping up the ocean of red ink left behind by Greenspan. It's not his
fault. He should be applauded for dispelling the decades-long illusion that
a nation can borrow its way to prosperity or that chronic indebtedness is
the same as real wealth. It's not; and the bill has finally come due.
Of course, now that the low-interest speculative orgy is over; there's bound
to be a painful unwind of hyper-inflated assets, falling home prices,
tumbling stock markets, increased unemployment, and a generalized
credit-contraction throughout the real economy. Ouch. Who said it was going
to be easy?
Bernanke's summation:
At present, my baseline outlook involves a period of sluggish growth,
followed by a somewhat stronger pace of growth starting later this year as
the effects of monetary and fiscal stimulus begin to be felt.... It is
important to recognize that downside risks to growth remain, including the
possibilities that the housing market or the labor market may deteriorate to
an extent beyond that currently anticipated, or that credit conditions may
tighten substantially further.
(Editor's translation) "Discount everything I've said here today if the
economy blows up - as I fully-expect it will - from decades of regulatory
neglect and the myriad multi-trillion dollar Ponzi-schemes which have put
the entire financial system at risk of a major heart attack."
Bernanke's candor is admirable, but it is little relief for the people who
will have to soldier-on through the hard times ahead. Perhaps, next time he
could spare us all the lengthy oratory and just forward a brief cablegram to
Congress saying something like this:
"We are deeply sorry, but we have totally fu ed up your economy with our
monetary hanky-panky. You are all in very deep Doo-doo. Prepare for the
worst."
Our sincerest regrets,
The Fed
_______
Mike Whitney
--
NOTICE: This post contains copyrighted material the use of which has not
always been authorized by the copyright owner. I am making such material
available to advance understanding of
political, human rights, democracy, scientific, and social justice issues. I
believe this constitutes a 'fair use' of such copyrighted material as
provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson
By Mike Whitney
Created Feb 19 2008 - 1:14pm
Even veteran Fed-watchers were caught off-guard by Chairman Bernanke's
performance before the Senate Banking Committee on Thursday. Bernanke was
expected to make routine comments on the state of the economy but, instead,
delivered a 45-minute sermon detailing the afflictions of the foundering
financial system. The Senate chamber was stone-silent throughout. The
gravity of the situation is finally beginning to sink in.
For the most part, the pedantic Bernanke looked uneasy; alternately biting
his lower lip or staring ahead blankly like a man who just watched his
poodle get run over by a Mack truck. As it turns out, Bernanke has plenty to
worry about, too. Consumer confidence has dropped to levels not seen since
the 1970s recession, real estate has gone off a cliff, credit-brushfires are
breaking out everywhere, and the stock market continues to gyrate
erratically. No wonder the Fed-chief looked more like a deck-hand on the
Lusitania than the monetary-czar of the most powerful country on earth.
Bernanke's prepared remarks were delivered with the solemnity of a priest
performing Vespers. But he was clear, unlike his predecessor, Greenspan, who
loved speaking in hieroglyphics.
Bernanke:
As you know, financial markets in the United States and in a number of other
industrialized countries have been under considerable strain since late last
summer. Heightened investor concerns about the credit quality of mortgages,
especially subprime mortgages with adjustable interest rates, triggered the
financial turmoil. However, other factors, including a broader retrenchment
in the willingness of investors to bear risk, difficulties in valuing
complex or illiquid financial products, uncertainties about the exposures of
major financial institutions to credit losses, and concerns about the weaker
outlook for the economy, have also roiled the financial markets in recent
months."
Yes, of course. The banks are ailing from their subprime investments while
Europe is sinking fast from $500 billion in unsellable asset-backed garbage.
The whole system is clogged with crappy paper and deteriorating collateral.
Now there are problems popping up in auction rate sales and the
normally-safe municipal bonds. The whole financial Tower of Babel is
cracking at the foundation.
Bernanke continues:
Money center banks and other large financial institutions have come under
significant pressure to take onto their own balance sheets the assets of
some of the off-balance-sheet investment vehicles that they had sponsored.
Bank balance sheets have swollen further as a consequence of the sharp
reduction in investor willingness to buy securitized credits, which has
forced banks to retain a substantially higher share of previously committed
and new loans in their own portfolios. Banks have also reported large
losses, reflecting marked declines in the market prices of mortgages and
other assets that they hold. Recently, deterioration in the financial
condition of some bond insurers has led some commercial and investment banks
to take further markdowns and has added to strains in the financial markets.
Bernanke sounds more like an Old Testament prophet reading passages from the
Book of Revelations than a Central Banker. But what he says is true; even
without the hair-shirt. The humongous losses at the investment banks have
forced them to go trolling for capital in Asia and the Middle East just to
stay afloat. And, when they succeed, they're forced to pay excessively high
rates of interest. The true cost of capital is skyrocketing. That's why the
banks are protecting their liquidity and cutting back on new loans. Most of
the banks have also tightened lending standards which is slowing down the
issuance of credit and threatens to push the economy into a deep recession.
When banks cramp-up, the overall economy shrinks. It's just that simple, no
credit, no growth. Credit is the lubricant that keeps the capitalist
locomotive chugging-along. When it dwindles, the system screeches to a halt.
"DOWNSIDE RISKS TO GROWTH HAVE INCREASED"
Bernanke again:
In part as the result of the developments in financial markets, the outlook
for the economy has worsened in recent months, and the downside risks to
growth have increased. To date, the largest economic effects of the
financial turmoil appear to have been on the housing market, which, as you
know, has deteriorated significantly over the past two years or so. The
virtual shutdown of the subprime mortgage market and a widening of spreads
on jumbo mortgage loans have further reduced the demand for housing, while
foreclosures are adding to the already-elevated inventory of unsold homes.
Further cuts in homebuilding and in related activities are likely....
Conditions in the labor market have also softened. Payroll employment, after
increasing about 95,000 per month on average in the fourth quarter, declined
by an estimated 17,000 jobs in January. Employment in the construction and
manufacturing sectors has continued to fall, while the pace of job gains in
the services industries has slowed. The softer labor market, together with
factors including higher energy prices, lower equity prices, and declining
home values, seem likely to weigh on consumer spending in the near term.
So, let's summarize. The banks are battered by their massive subprime
liabilities. Housing is in the tank. Manufacturing is down. Food and energy
are up. Unemployment is rising. And consumer spending has shriveled to the
size of an acorn. All that's missing is a trumpet blast and the arrival of
the Four Horseman. How is it that Bernanke's economic post-mortem never made
its way into the major media? Is there some reason the real state of the
economy is being concealed from 'we the people'?
Bernanke continues:
On the inflation front, a key development over the past year has been the
steep run-up in the price of oil. Last year, food prices also increased
exceptionally rapidly by recent standards, and the foreign exchange value of
the dollar weakened.... (If) inflation expectations to become unmoored or
for the Fed's inflation-fighting credibility to be eroded could greatly
complicate the task of sustaining price stability and reduce the central
bank's policy flexibility to counter shortfalls in growth in the future.
Right. So, if the Fed's rate-cutting strategy doesn't work and the economic
troubles persist (and prices continue to go through the roof) then we're
S.O.L. (sh out of luck) because the Fed has no more arrows in its quiver.
It's rate cuts or death. Great. So, we can expect Bernanke to hack away at
rates until they're down to 1% or lower (duplicating the downturn in Japan)
hoping that the economy shows some sign of life before it takes two full
wheelbarrows of greenbacks to buy a quart of milk and a few seed-potatoes.
Sounds like a plan!
We don't blame Bernanke. He's been remarkably straightforward from the very
beginning and deserves credit. He's simply left with the thankless task of
mopping up the ocean of red ink left behind by Greenspan. It's not his
fault. He should be applauded for dispelling the decades-long illusion that
a nation can borrow its way to prosperity or that chronic indebtedness is
the same as real wealth. It's not; and the bill has finally come due.
Of course, now that the low-interest speculative orgy is over; there's bound
to be a painful unwind of hyper-inflated assets, falling home prices,
tumbling stock markets, increased unemployment, and a generalized
credit-contraction throughout the real economy. Ouch. Who said it was going
to be easy?
Bernanke's summation:
At present, my baseline outlook involves a period of sluggish growth,
followed by a somewhat stronger pace of growth starting later this year as
the effects of monetary and fiscal stimulus begin to be felt.... It is
important to recognize that downside risks to growth remain, including the
possibilities that the housing market or the labor market may deteriorate to
an extent beyond that currently anticipated, or that credit conditions may
tighten substantially further.
(Editor's translation) "Discount everything I've said here today if the
economy blows up - as I fully-expect it will - from decades of regulatory
neglect and the myriad multi-trillion dollar Ponzi-schemes which have put
the entire financial system at risk of a major heart attack."
Bernanke's candor is admirable, but it is little relief for the people who
will have to soldier-on through the hard times ahead. Perhaps, next time he
could spare us all the lengthy oratory and just forward a brief cablegram to
Congress saying something like this:
"We are deeply sorry, but we have totally fu ed up your economy with our
monetary hanky-panky. You are all in very deep Doo-doo. Prepare for the
worst."
Our sincerest regrets,
The Fed
_______
Mike Whitney
--
NOTICE: This post contains copyrighted material the use of which has not
always been authorized by the copyright owner. I am making such material
available to advance understanding of
political, human rights, democracy, scientific, and social justice issues. I
believe this constitutes a 'fair use' of such copyrighted material as
provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson
