I Guess Nobody Wants to Read Bad News: Fed Chair Ben Bernanke’s Testimony to Congress
Fed Chair Ben Bernanke testified to Congress this past week on the topic: “Economic and financial conditions and the federal budget.” I had hoped to watch it, but as it turned out I didn’t have the time that day, so later that evening I went online to find a transcript of Bernanke’s testimony. It wasn’t the least bit hard to find, the Federal Reserve posted it on its site, federalreserve.gov.
It wasn’t particularly long, so I read it right away, and it was chilling. Finally, I thought, Bernanke has said it in no uncertain terms: We’re in deep, deep trouble; the answers are going to mean widespread pain, and the impact essentially permanent. Based on what the Fed Chief said, our economic crisis is not something we can expect to follow the course of past recessions, to the contrary, what’s ahead for this country is not the same America as the one we’ve known over the last 30 years.
Like I said, it was chilling.
You have to understand, Ben Bernanke worked on his testimony for weeks. It was written, edited, re-written and re-edited. Many times. A lot of people worked very hard to make sure that his testimony’s outlook would come across as being as positive as possible, without being accused of misinforming Congress or the nation.
And yet, when I finished reading the Fed chief’s testimony, I knew the outlook was anything but positive.
So, wasn’t I surprised to wake up the next morning to find the press reports about Bernanke’s testimony trumpeting only its positive aspects? His more sobering, or chilling comments were nowhere to be found.
I’ll present several examples here. And I think it’s very important that you take note, because knowing what’s ahead, while it may seem depressing at the moment, much more importantly allows you to make plans so as to optimize the future reality, which in my mind is infinitely better than knocking your head against the wall in frustration as you sail into, what is certain to be, the headwind of the century.
Ladies and Gentlemen, I give you excerpts from the testimony given by Chairman Bernanke before the Committee on the Budget, U.S. House of Representatives, Washington, D.C. on June 9, 2010…
(And, any emphasis added, was added by me.)
“Chairman Spratt, Ranking Member Ryan, and other members of the Committee, I am pleased to have this opportunity to offer my views on current economic and financial conditions and on issues pertaining to the federal budget.”
… The latest economic projections of Federal Reserve Governors and Reserve Bank presidents, which were made near the end of April, anticipate that real gross domestic product (GDP) will grow in the neighborhood of 3-1/2 percent over the course of 2010 as a whole and at a somewhat faster pace next year. This pace of growth, were it to be realized, would probably be associated with only a slow reduction in the unemployment rate over time. In this environment, inflation is likely to remain subdued.
Let’s see the $8,000 tax credit expired, as did the rebates for energy efficient appliances, and then building materials plunged 9.3 percent, and housing fell off a cliff, and that can’t be good for big ticket items like appliances going forward. Now what? More rebates and tax credits? There’s a difference between actual demand and subsidized demand. It should be clear that there is very little actual demand. The only demand we’ve seen has been the result of tax credits and subsidies.
Retail sales were up huge year-over-year but that’s not much of a comparison. Regardless, general merchandise sales are up less that 2%.
The truth is that retail sales are far lower than reported for several reasons. One is the methodology being used. According to the Advance Sales Report:
“The advance estimates are based on a sub-sample of the Census Bureau’s full retail and food services sample. A stratified random sampling method is used to select approximately 5,000 retail and food services firms whose sales are then weighted and benchmarked to represent the complete universe of over three million retail and food services firms.”
There’s another factor that skews the retail sales reports. There have been many stores, Circuit City as just one example, that have gone out of business since the recession began, and Best Buy’s sales certainly benefited from Circuit City going under, for example. But, some of the sales from closed stores have disappeared… for good. And that’s not showing up in the happy news “advance sales” reports.
The right way to assess retail sales is by looking at sales tax receipts, and those have been miserable across the board and are about to take a turn for the worse.
… Although the support to economic growth from fiscal policy is likely to diminish in the coming year, the incoming data suggest that gains in private final demand will sustain the recovery in economic activity.
Likely to diminish? So, that’s it for the stimulus, right? Because we’re out of money, right? We’ve pumped trillions of dollars into our economy, without it positively affecting unemployment, retail sales, or foreclosures. How bad things would be without that stimulus? Now we’re going to start seeing the answer to that question.
… At the same time, significant restraints on the pace of the recovery remain. In the housing market, sales and construction have been temporarily boosted lately by the homebuyer tax credit. But looking through these temporary movements, underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit.
Okay, so finally it seems that the Fed chief has stopped pretending that the housing market has recovered and is admitting that there has only been a temporary boost made possible by tax credits. And, firmed just a little since mid-2009? As I recall, things weren’t so red hot in mid-2009 as far as the housing market was concerned. So, with incomes still falling, and unemployment still rising, I wonder what Bernanke thinks housing will do now? No, actually I don’t.
… the labor market was hit particularly hard by the recession, but we have begun to see some modest improvement recently in employment, hours of work, and labor income. Payroll employment rose by 431,000 in May, but that figure importantly reflected an increase of 411,000 in hiring for the decennial census.
Ben, Ben, Ben… this is almost to sad to write about. Why would you quote payroll employment increasing in May, when your next sentence admits that it was only due to the once a decade hiring of census workers… who will all be out of work by August? Sad, just sad.
Unemployment is inn a terrible state, with the number of people out of work over 30 weeks going nowhere but up. And with foreclosures rising, spending dropping, and government stimulus ending, there should be little question as to where things might go from here.
Also, remember that the methodology for calculating unemployment isn’t an exact science. The Bureau of Labor Statistics uses it’s “birth-death model,” which estimates where we are in the economic cycle and then tries to guess at the number of companies hiring and firing. In April, the BLS said we created 288,000 jobs, you might recall, but ADP’s report said the number was 35,000. Anyone want to bet on which one ends up being right?
… Private payroll employment has risen an average of 140,000 per month for the past three months, and expectations of both businesses and households about hiring prospects have improved since the beginning of the year. In all likelihood, however, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009.
Improved since the beginning of the year… when things were dire? Watch out for these type of comparisons. The government and others are using them all the time lately to make things sound way better than the reality of the situation.
And, when the Fed chief says “a significant amount of time,” he means something along the lines of a decade or longer. Otherwise, he would have given a range, like 3-5 years. He couldn’t do that with a straight face, so he went with “a significant amount of time”.
… On the inflation front, recent data continue to show a subdued rate of increase in consumer prices. Over the past two years, overall consumer prices have fluctuated in response to large swings in energy and food prices. But aside from these volatile components, a moderation in inflation has been clear and broadly based over this period.
A subdued rate of increase in consumer prices means prices are going down, otherwise known as “DEFLATION”. But deflation is a scary word, so we’re having a subdued rate of increase. Again, with trillions having been pumped in, we shouldn’t have falling prices were the recovery they speak of real.
… By early May, financial strains had increased significantly as investors focused on several interrelated issues, including whether the fiscally stronger euro-area governments would provide financial support to the weakest members, the extent to which euro-area growth would be slowed by efforts at fiscal consolidation, and the extent of exposure of major European financial institutions to vulnerable countries.
It’s no secret that Europe is in trouble in so many ways. Geithner was at the G20 meeting of finance ministers from 20 nations last week, and France and Germany both told him to pound sand. They’re not going to continue to try solving the problem by papering over it with money, they’re going to cut back and pay off debt. The British Prime Minister has said that the cuts and changes “will affect our very way of life”. That doesn’t sound like a recovery, does it?
And as far as fiscal stimulus goes, Europe’s throwing money at the problem is likely to work about as well as ours did, wouldn’t you think? Expect Greece, Hungary, Spain and perhaps others to continue circling the drain in the year to come.
And, you also might find it interesting that Geithner’s speech at the G20 told the other nations that they could not depend on the America consumer’s spending to bring their economies back this time. Uh oh.
… U.S. financial markets have been roiled in recent weeks by these developments, which have triggered a reduction in demand for risky assets: Broad equity market indexes have declined, and implied volatility has risen considerably. Treasury yields have fallen as much as 50 basis points since late April, primarily as a result of safe-haven flows that boosted the demand for Treasury securities. Corporate spreads have widened over the same period, and some issuance of corporate bonds has been postponed, especially by speculative-grade issuers.
No one wants to be in anything risky when things are so risky. Flight to safety means, look out below. And bond offerings being postponed means that they can’t sell them, because no one wants to take a chance that they won’t be able to pay the debt back, which would not be the case were there an actual recovery underway.
… European leaders have put in place a number of strong measures. Countries under stress have committed to address their fiscal problems. A major assistance package has been established jointly by the European Union (EU) and the International Monetary Fund (IMF) for Greece. To backstop near-term financing needs of its members more generally, the EU has established a European Financial Stabilization Mechanism with up to 500 billion euros in funding, which could be used in tandem with significant bilateral support from the IMF.
Like I just said a few comments back… the European stimulus is only expected to “backstop near term financing needs,” no one thinks it’s going to solve any of the problems the EU countries are facing.
… Nevertheless, history makes clear that failure to achieve fiscal sustainability will, over time, sap the nation’s economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability.
I didn’t know OUR history made that all that clear, but if he says so. I’ve never heard a Fed chief say that something might sap our nation’s vitality, or reduce our living standards… IN MY LIFE. Have you?
“… Our nation’s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession.”
Okay, this one made me queasy. So, we’ve “deteriorated appreciably since the onset of the financial crisis”. Well, I’ve known that throughout, but now Bernanke’s admitting this to Congress? Remember, he wanted to be as positive as possible when testifying and worked on what he would say for weeks.
… The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the necessary policy actions taken to ease the recession and steady financial markets.
Again, he now sees the problem clearly, and we’re in trouble… deep trouble. We have to start paying down the enormous debt we’ve built up trying to stimulate our economy. It hasn’t worked, as he said just above, and now we have to pay some debt down… but how? This is going to be painful and change our standard of living going forward. We’ve waited too long to step in and change things. There’s no other option now.
… Even after economic and financial conditions have returned to normal, however, in the absence of further policy actions, the federal budget appears to be on an unsustainable path. A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time.
We’re on an unsustainable path. The Fed chief has finally admitted that we are on an unsustainable path. And that’s EVEN AFTER we’ve returned to normal, whatever the new normal will be.
… Among the primary forces putting upward pressure on the deficit is the aging of the U.S. population, as the number of persons expected to be working and paying taxes into various programs is rising more slowly than the number of persons projected to receive benefits.
The 78 million baby boomers are not going to behave the same way they used to because they’re older. They won’t buy new cars every two or three years. They won’t spend as much period. And the generation behind them, just isn’t that big or that rich. Social Security is about to start sweating as is Medicare.
… To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.
“Sharp shifts in spending and tax policies,” means cutting Social Security… rising taxes by 33%… you know… fun stuff like that.
… Achieving long-term fiscal sustainability will be difficult. But unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth.
So, in other words, absent our “strong commitment to fiscal responsibility,” which we undoubtedly have not made… we won’t have economic growth or financial stability in the future? Why would we have made such a “strong commitment to fiscal responsibility,” when all we’ve been hearing is how recovery is right around the corner? And Ben Bernanke talking about a strong commitment to fiscal responsibility is the very essence of irony. You first, Ben, you first.
People… we have to stop the foreclosures. They breed more foreclosures. They reduce spending and lower tax receipts. They cause increased unemployment. They cause more bonds to default. They make our banks insolvent. They are a “HOLE IN THE BOTTOM OF OUR BOAT. It doesn’t matter what else we do… as long as we allow the foreclosures to continue unchecked… we are doomed to a future that none of us would want for our children.
Notice how the Chairman of the Federal Reserve Bank, during his testimony to Congress, didn’t even really mention the FORECLOSURE CRISIS. Why, doesn’t that seem the least bit strange to anyone else?
Because we can’t stop the foreclosures, can we? Nope, it seems that we can’t. Why? Because more than half of this country still believes that the foreclosure crisis was caused by irresponsible borrowers buying more house than they could afford, as opposed to Goldman Sachs selling worthless bonds and credit default swaps to every country and pension plan on the globe. So, now we can’t get the political support to help those irresponsible borrowers, and because of that educational deficiency… we’re going down.
Great… absolutely great. My daughter’s future is going to be spent in a nation that used to be economically vibrant, but is now mired in decades of recession because of people jealous of their neighbors, happy at their plight, that can’t seem to listen, and won’t read a damn book or two. It’s not funny, people… not funny at all.