It is far easier to translate Bernanke than Greenspan. Both men had this task: to deceive the public. Greenspan adopted verbal obfuscation as his technique. Bernanke has adopted boredom.
I hope this exercise will help you understand his speech of August 27.
CHALLENGES AND DAUNTING CHALLENGES
People who are unfamiliar with Bernanke's strategy of downplaying everything, in good professorial fashion, may miss the significance of what he said.
On the whole, when the eruption of the Panic of 2008 threatened the very foundations of the global economy, the world rose to the challenge, with a remarkable degree of international cooperation, despite very difficult conditions and compressed time frames.
Translation: (1) "The world rose to the challenge." Hank Paulson nationalized the mortgage market unilaterally. He let Lehman Brothers go bust, so as to catch Congress's attention. Then he got Congress to bail out AIG and the largest banks. I cooperated. The FED swapped liquid Treasury debt at face for heavily discounted promises to pay that were held by the largest banks for which there was no market.
Then the Financial Standards Accounting Board reversed itself on FAS 157. Banks would not be required to list their assets at market value. This kept them solvent.
Then other central banks and politicians imitated Paulson and me by bailing out their largest banks. We set the pattern. They followed suit.
(2) "Despite very difficult conditions and short time frames." Translation: The American banking system had locked up right under our noses, and nobody knew what to do. The domino effect pointed to what Greenspan in 1998 called "cascading cross defaults" internationally: the inability of banks to settle their accounts at the end of the day, because of money owed to them. Paulson spent time puking in his office bathroom, but he pulled it off in time. It was nip and tuck for a time.
Notwithstanding some important steps forward, however, as we return once again to Jackson Hole I think we would all agree that, for much of the world, the task of economic recovery and repair remains far from complete.
Translation: Everyone knows the economy is slowing. The two stimulus packages totalling $1.5 trillion barely reversed the recession, assuming it reversed at all. Meanwhile, the pantywaists on the National Bureau of Economic Research committee that decides when recessions end decided in April not to decide. That left me holding the bag. So the FED has declared that it ended in April 2009. Like it or lump it.
In many countries, including the United States and most other advanced industrial nations, growth during the past year has been too slow and joblessness remains too high.
Translation: The entire world economy is busted. Greenspan sucked the other central banks into pumping up their economies with inflation and low interest rates, and when our bubble burst, so did everyone else's.
Financial conditions are generally much improved, but bank credit remains tight; moreover, much of the work of implementing financial reform lies ahead of us.
Translation: This is the best opportunity in 70 years to use government to take more power over the capital markets. A crisis is a terrible thing to waste. We got the country into this mess, and we're going to take on huge new authority to make sure it never happens again. That's the Keynesian way.
Managing fiscal deficits and debt is a daunting challenge for many countries, and imbalances in global trade and current accounts remain a persistent problem.
Translation: "Challenge," means "a problem with no known solution." "Daunting challenge" means "the next time, this sucker may go down," to quote President Bush. "Persistent problem" means the slow economy is not going to go away anytime soon after Bernanke retires.
This list of concerns makes clear that a return to strong and stable economic growth will require appropriate and effective responses from economic policymakers across a wide spectrum, as well as from leaders in the private sector.
Translation: There is going to be central planning like we have not seen since the end of World War II. Corporate leaders are going to fall in line, or else they will face some really daunting problems.
Central bankers alone cannot solve the world's economic problems.
Translation: If we lose this sucker, I want some others up at the podium here to share the blame.
That said, monetary policy continues to play a prominent role in promoting the economic recovery and will be the focus of my remarks today.
Translation: The FED is mainly in charge, so don't mess with it. If our policies fail, we'll lose this sucker.
PREVIEWS OF COMING ATTRACTIONS
He said that at the previous Jackson Hole meeting, the world economy was recovering.
Concerted government efforts to restore confidence in the financial system, including the aggressive provision of liquidity by central banks, were essential in achieving that outcome. Monetary policies in many countries had been eased aggressively.
Translation: Confidence had failed in the financial system that the government has regulated for decades. The system needed an infusion of counterfeit money to restore confidence — lots and lots of counterfeit money. This was essential.
Fiscal policy — including stimulus packages, expansions of the social safety net, and the countercyclical spending and tax policies known collectively as automatic stabilizers — also helped to arrest the global decline.
Translation: Also required were budget deficits larger than anything seen since World War II.
Expansionary fiscal policies and a powerful inventory cycle, helped by a recovery in international trade and improved financial conditions, fueled a significant pickup in growth.
Translation: "Significant" means "we didn't lose the sucker."
At best, though, fiscal impetus and the inventory cycle can drive recovery only temporarily. For a sustained expansion to take hold, growth in private final demand — notably, consumer spending and business fixed investment — must ultimately take the lead. On the whole, in the United States, that critical handoff appears to be under way. However, although private final demand, output, and employment have indeed been growing for more than a year, the pace of that growth recently appears somewhat less vigorous than we expected.
Translation: "Somewhat less vigorous" means "the Democrats will surely lose the House in November."
Importantly, the painfully slow recovery in the labor market has restrained growth in labor income, raised uncertainty about job security and prospects, and damped confidence.
Translation: The Democrats may even lose the Senate.
The prospects for household spending depend to a significant extent on how the jobs situation evolves. But the pace of spending will also depend on the progress that households make in repairing their financial positions.
Translation: We don't know what the pace of spending will be. We don't know when the job market will recover.
Among the most notable results to emerge from the recent revision of the U.S. national income data is that, in recent quarters, household saving has been higher than we thought — averaging near 6 percent of disposable income rather than 4 percent, as the earlier data showed. On the one hand, this finding suggests that households, collectively, are even more cautious about the economic outlook and their own prospects than we previously believed.
Translation: Federal Reserve economists looked at the statistics, compared them with their income and job tenure, and concluded that things were not too bad. The public was not equally secured from reality.
Household finances and attitudes also bear heavily on the housing market, which has generally remained depressed. In particular, home sales dropped sharply following the recent expiration of the homebuyers' tax credit.
Translation: We could lose this sucker.
Going forward, improved affordability — the result of lower house prices and record-low mortgage rates — should boost the demand for housing. However, the overhang of foreclosed-upon and vacant housing and the difficulties of many households in obtaining mortgage financing are likely to continue to weigh on the pace of residential investment for some time yet.
Translation: It's a buyer's market in housing. The smart buyer waits for a short sale. The really smart buyer waits for a foreclosure.
In the business sector, real investment in equipment and software rose at an annual rate of more than 20 percent over the first half of the year. Some of these gains no doubt reflected spending that had been deferred during the crisis, including investments to replace or update existing equipment.
Translation: Stuff was wearing out.
In contrast, outside of a few areas such as drilling and mining, business investment in structures has continued to contract, although the rate of contraction appears to be slowing.
Translation: Commercial real estate is going down. Everyone knows it. There will be deals galore.
Although most firms faced problems obtaining credit during the depths of the crisis, over the past year or so a divide has opened between large firms that are able to tap public securities markets and small firms that largely depend on banks. Generally speaking, large firms in good financial condition can obtain credit easily and on favorable terms; moreover, many large firms are holding exceptionally large amounts of cash on their balance sheets. For these firms, willingness to expand — and, in particular, to add permanent employees — depends primarily on expected increases in demand for their products, not on financing costs.
Translation: The FED and the government took action to bail out the fat cats, as they always have. But large firms are still scared to death. They are sitting on top of short-term deposits because they know that we could lose this sucker.
Bank-dependent smaller firms, by contrast, have faced significantly greater problems obtaining credit, according to surveys and anecdotes.
Translation: There will be distressed sales for the larger firms to buy at real bargains. The ones with cash will get the best deals.
The Federal Reserve, together with other regulators, has been engaged in significant efforts to improve the credit environment for small businesses. For example, through the provision of specific guidance and extensive examiner training, we are working to help banks strike a good balance between appropriate prudence and reasonable willingness to make loans to creditworthy borrowers. We have also engaged in extensive outreach efforts to banks and small businesses.
Translation: The FED and the government are pushing banks to lend. The banks have not responded. Other than this, nothing is happening.
There is some hopeful news on this front: For the most part, bank lending terms and conditions appear to be stabilizing and are even beginning to ease in some cases, and banks reportedly have become more proactive in seeking out creditworthy borrowers.
Translation: The statistics still show that bank lending is falling like a stone, like nothing since the Great Depression. "Some cases" means "in a handful of cases in communities where at least one local bank stayed out of commercial real estate." "Reportedly" means "a secretary at the Kansas City FED heard a rumor."
Incoming data on the labor market have remained disappointing. Private-sector employment has grown only sluggishly, the small decline in the unemployment rate is attributable more to reduced labor force participation than to job creation, and initial claims for unemployment insurance remain high.
Translation: Nancy Pelosi will not be the Speaker of the House next January.
Firms are reluctant to add permanent employees, citing slow growth of sales and elevated economic and regulatory uncertainty.
Translation: The government will reduce this uncertainty by getting new regulations into The Federal Register much faster. There needs to be far more detailed regulation.
Like others, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter. However, that deterioration seems to have reflected a number of temporary and special factors.
Translation: The balance of trade is in the crapper again, just as it was from 1990 to 2009, and there is no end in sight. But that secretary at the Kansas City FED thinks it's temporary.
Generally, the arithmetic contribution of net exports to growth in the gross domestic product tends to be much closer to zero, and that is likely to be the case in coming quarters.
Translation: Since the country has not had any net exports in two decades, the deficit will cut GDP. Why good deals from Asian producers increase American consumers' satisfaction but reduce GDP is a problem for the statisticians to answer. It's a Keynesian thing.
Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year. Much of the unexpected slowing is attributable to the household sector, where consumer spending and the demand for housing have both grown less quickly than was anticipated.
Translation: The high-paid economists at the FOMC did not see what was coming. Consumers are scared, so they are saving. This is bad for the economy, according to Keynes.
Consumer spending may continue to grow relatively slowly in the near term as households focus on repairing their balance sheets. I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace.
Translation: The economists at the FOMC who did not see what was coming have decided that consumer spending will expand. "At a relatively modest pace" means "something above zero,"
Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place. Monetary policy remains very accommodative, and financial conditions have become more supportive of growth, in part because a concerted effort by policymakers in Europe has reduced fears related to sovereign debts and the banking system there.
Translation: Monetary policy has been contracting since last March, but nobody in the press ever looks at the charts, so the media will not notice. Meanwhile, the Greek crisis has been delayed by the bailout that the German government paid for, against the widespread objections of German voters.
Banks are improving their balance sheets and appear more willing to lend. Consumers are reducing their debt and building savings, returning household wealth-to-income ratios near to longer-term historical norms. Stronger household finances, rising incomes, and some easing of credit conditions will provide the basis for more-rapid growth in household spending next year.
Translation: Rising thrift caused a slowdown in spending, which is why growth has been slower than the FOMC forecasted earlier this year. However, rising incomes above zero, when coupled with easing credit conditions, which FED statistics say are not happening, will persuade consumers that they have saved enough. They will spend. The FOMC economists are sure of this.
Businesses' investment in equipment and software should continue to grow at a healthy pace in the coming year, driven by rising demand for products and services, the continuing need to replace or update existing equipment, strong corporate balance sheets, and the low cost of financing, at least for those firms with access to public capital markets.
Translation: Fat cats will get fatter.
Rising sales and increased business confidence should also lead firms to expand payrolls. However, investment in structures will likely remain weak.
Translation: The commercial real estate market will still be in the tank.
On the fiscal front, state and local governments continue to be under pressure; but with tax receipts showing signs of recovery, their spending should decline less rapidly than it has in the past few years.
Translation: Kiss state pension funds goodbye.
Federal fiscal stimulus seems set to continue to fade but likely not so quickly as to derail growth in coming quarters.
Translation: With the Republicans in control of Congress, they will play spoilers. Obama will get no more big spending bills into law.
Although output growth should be stronger next year, resource slack and unemployment seem likely to decline only slowly. The prospect of high unemployment for a long period of time remains a central concern of policy.
Translation: The job market will be a disaster for years. "A central concern for policy" means nobody knows what to do about it; nothing has worked.
Not only does high unemployment, particularly long-term unemployment, impose heavy costs on the unemployed and their families and on society, but it also poses risks to the sustainability of the recovery itself through its effects on households' incomes and confidence.
Translation: Anyone who believed my previous puffery about the recovery has the IQ of something really funny that Dave Barry would come up with.
Maintaining price stability is also a central concern of policy. Recently, inflation has declined to a level that is slightly below that which FOMC participants view as most conducive to a healthy economy in the long run.
Translation: "Price stability" means rising prices. Prices have been almost flat for a year, which is unacceptable to Keynesians, which senior FED economists are.
With inflation expectations reasonably stable and the economy growing, inflation should remain near current readings for some time before rising slowly toward levels more consistent with the Committee's objectives.
Translation: Get ready for quantitative easing.
At this juncture, the risk of either an undesirable rise in inflation or of significant further disinflation seems low. Of course, the Federal Reserve will monitor price developments closely.
Translation: The FED is paid to run the numbers. It will run the numbers. I am not about to say in advance what we plan to do or when.
This was the end of Bernanke's first half. I will translate Part 2 on Monday.
August 28, 2010
Copyright © 2010 Gary North