Generation 911 - A Cascadian Milestone For Beginners
Complicit Means Always Having to Say You’re Sorry: An UnEmbedded Journalist Dahr Jamail Speaks His Truth
Compassionate Social Action
Multiply Smallnesses - American Agriculture from Consumption to an Ecology of Hope - The InnerView with Gary Holthaus
Physicians’ Perspective: Understanding Hospice
The Male Road Map
You Can Get Better: Therapeutic Massage - Next Step to Recovery
“You Are All Dead Ducks” - Bernanke’s State of the Economy Message
Anti-Warriors - Divided and Conquered: When Pragmatic Alliance Trumps Idealistic Failure
The Turning Wheel - Astrology for rEvolutionaries - Spring, 2008
Life Advice from Catherine Ingram
“You Are All Dead Ducks” - Bernanke’s State of the Economy Message
Even veteran Fed-watchers were caught off-guard by Chairman (of the Federal Reserve System, i.e. the National Bank) Ben Bernanke’s performance before the Senate Banking Committee early this spring. 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 sub-prime 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 sub-prime 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”
So, let’s summarize. The banks are battered by their massive sub-prime 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!
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.”
(Translation) “Discount everything I’ve said here today if the economy blows upas I fully-expect it willfrom 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”.
Ben 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.
Mike Whitney is a freelance writer in Washington state who covers civil liberties, politics and the economy for counterpunch, information clearinghouse, dissident voice and market oracle He can be reached at firstname.lastname@example.org
Site Updated Summer 08