• Bernanke's State of the Economy Speech: u2018You Are All Dead Ducks'

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    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.

    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.


    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.


    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
    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

    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?


    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.

    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."

    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
    The Fed

    19, 2008

    Mike Whitney
    [send him mail] lives
    in Washington state.

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