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Bernanke’s comments corroborate years of projections on this blog and by others including Johnson and Roubini. We are kidding ourselves if we think that the economy is going to improve without addressing the housing problem. In order to bring unemployment down to a level where the threat of financial chaos is truly diminished aggregate demand must increase significantly. In our country aggregate demand is largely determined by consumer demand. Consumer demand exists only where consumers have sufficient resources available to them to buy things.
At one time credit was relatively unimportant since median income for the middle class was sufficient to run a household on one income and still purchase the goods and services that the economy had to offer. For the last 35 years median income has either been stagnant or decreased in real dollar terms depending upon which analysis is used as an index. Unemployment is high and as Bernanke admits, any indication that unemployment is improving is coming largely from a decrease in layoffs rather than an increase in hiring. Savings are virtually non-existent. Therefore we can safely assume that consumer demand, representing 70% of aggregate demand will not improve as a result of money held by consumers or earned by consumers.
In the wake of the neo conservative flood where it was stupidly assumed that reducing wages would not have a long term negative effect on consumer demand, the replacement for wages was debt. We have run the gamut of credit card debt and other consumer finance to the extreme of payday loans which collectively siphon a substantial amount of what would be aggregate demand. The recipients of this largesse are the banks and the losers are the eager institutional investors seeking higher returns. Consumers are mostly maxed out on every form of credit that could be available to them. Therefore any hope of an increase in aggregate demand from consumers based upon their willingness to spend even if they lack the financial resources is a fairy tale. Simply stated, consumers lack money and credit and therefore lack the ability to make significant purchases in the marketplace. Those who point to minor upticks in the purchases of ipads or iphones are ignoring the greater reality.
The financial industry chased most of America and corralled them into a scenario in which “pretend” money was used instead of real money. They did it using housing as the bait. Again the investors are the losers but so are the homeowners and the tax payers who are now paying the fictitious bill with freshly minted dollars that are constantly diminishing in value. The use of the home as a piggy bank from which one could make an ATM like withdrawal for the purchase of goods and services is also gone.
That leaves us with aggregate demand being 70% dependent upon a class of people who have been cut out from participation at the table where commerce is intended to flow. The only remedy is to create incentives for those consumers who are or were homeowners to return to that table. In order for this to happen the pornographic amounts of money blowing through the few major banks who remain in charge of our financial system must be stopped and the flow must be reversed. There is ample reason to reverse that flow besides the fact that the banks have grown too fat. Most of the money controlled by those banks consists of ill gotten gains produced by fraud at the closing table with investors and the same fraud at the closing table with borrowers. The obvious solution is to restore the victims of the fraud through restitution which would also have the even greater benefit of restoring confidence in the american financial system.
Those who are pursuing policy that depends on the status quo being maintained are ignoring a basic legal fact. Chain of title in real property is determined by reference to hundreds of years of common law, statutory law and constitutional law. Eventually this game must end. Ultimately if we are to see the kind of improvement that Bernanke and others feel is necessary for the economy to actually recover they are going to be required to give up on the myth of too big to fail and to embrace the possibilities of bringing 7,000 community banks and credit unions to the table where a handful of mega banks once reigned supreme.
Perhaps if they give fairness and equity a chance they will come to realize that getting the cooperation of banks to purchase US Treasury Debt does not have to be a deal with the devil. Right now only a handful of banks are in on that deal where they borrow money at the Fed Window at an effective rate of zero and purchase US Treasury debt to keep the government running. The spread between the overnight Fed Window rate and the rate paid by the US Treasury is a gift to the banks that caused us this misery. If we are going to pursue that kind of policy to kick the can down the road is to give the gift to the innocent banks rather than to the merchants of doom.
Bernanke says U.S. needs faster growth
(Reuters) – The U.S. economy needs to grow more quickly to bring the unemployment rate down further, Federal Reserve Chairman Ben Bernanke said on Monday, defending the central bank’s policy of very low interest rates.
While he offered no indication the Fed is keen to embark on a third round of bond purchases, Bernanke also made clear the central bank is in no rush to reverse course after responding aggressively to a deep recession.
The jobless rate has dropped to 8.3 percent from 9.1 percent last summer, a move Bernanke said was “somewhat out of sync” with the rather modest pace of economic growth.
He said the decline could reflect an effort by businesses to recalibrate their payrolls after unusually heavy job cuts during the recession. If this is the case, he said, progress may stall.
“To the extent that this reversal has been complete, further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,” Bernanke told the National Association for Business Economics.
U.S. stocks climbed on hopes that Bernanke’s speech could be a precursor to more Fed bond purchases, with each of the major indexes up at least 1 percent. The dollar fell against the euro, but prices for U.S. government debt also slipped as worries about Europe’s debt crisis eased, sapping a safe-haven bid.
The U.S. central bank lowered overnight interest rates to near zero in December 2008 and has bought $2.3 trillion in debt securities to drive other borrowing costs lower in an effort to spur faster growth and cut unemployment.
“Reading between the lines, it sounds like he’s pushing the ball forward toward having a discussion about doing more,” said Chris Rupkey, economist at Bank of Tokyo-Mitsubishi, on the sidelines of the NABE conference.
After its last two meetings, the Fed said it would likely keep rates near zero at least through late 2014, but upbeat economic signs, including solid employment growth, have led investors to bet on a move as early as the middle of next year.
Bernanke’s speech appeared aimed at pushing back against those expectations.
BOND BUYING PROSPECTS
U.S. gross domestic product grew 3 percent in the fourth quarter, but is expected to have slowed to just below 2 percent in the first three months of this year. For all of last year, it grew only 1.7 percent, which would normally be too slow to move the unemployment rate lower.
Sluggish economic demand has kept alive the potential for more Fed bond purchases, despite the signs of improvement in the labor market.
The policy does have detractors, including some inside the central bank. Philadelphia Federal Reserve Bank President Charles Plosser on Monday said central banks should not have unfettered ability to purchase assets because that violates the traditional separation of monetary and fiscal policymaking and can allow governments to inflate away debts.
“Granting vast amounts of discretion to our central banks in the expectation that they can cure our economic ills or substitute for our lack of fiscal discipline is a dangerous road to follow,” Plosser told a conference in Paris.
That discomfort and differences over the outlook for the economy have led to an unusually wide range of views among policymakers over the proper course.
While a few officials are pushing for a further easing of monetary policy and some think rates might not need to rise until 2016, a hawkish minority believe the Fed would do well to reverse course this year. Bernanke is likely in the middle, biding his time to determine whether more bond purchases are needed but resolute in his thinking that any rate hikes can wait until 2014, analysts say.
The Fed chief reiterated his concern about long-term unemployment, which he said could cause workers’ skills to atrophy, but he argued against the notion that much of the problem was due to shifts in the economy that had made workers’ skills obsolete. If that were the case, the Fed might need to tighten policy sooner rather than later.
“The continued weakness in aggregate demand is likely the predominant factor. Consequently, the Federal Reserve’s accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well,” he said.
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