Wednesday, June 22, 2011

Bernanke Shows a Little Honesty...But Not Enough

Today, at the Federal Open Market Committee meeting, Ben Bernanke held his second ever press conference. The outlook as presented by the Chairmen, as diluted and unrealistic as it was, caused markets to finish off in the red as even the most bullish traders were given reason to worry.

Probably the most notable acknowledgment on the part of Bernanke was his admission that recent negative economic data may not be temporary which is an extension of admitting that he does not have all the answers. This acknowledgment was supplemented in a downgrade in economic growth forecasts for the rest of 2011 and 2012. As per A.A.: "The first step is admitting you have a problem."

However, given Bernanke and the Fed's track record I doubt they will ever get past that first step. What is more likely in the cards is their stating that the previous admission was erroneous. Indications that lead me to believe this are prevalent in supplemental statements made by the Chairman...

Firstly, the FOMC voted unanimously to keep interest rates at their artificially low rate at 0-.25%. Instinctively, the reason for keeping rates low is to encourage spending and disincentive savings. This is a reversion back to the fallacious Keynensian, demand-side philosophy that believes that spending is the way to revitalize an economy. Bernanke gloated that this policy, coupled with Quantitative Easing (purchases of bank assets resulting in an expansion of money supply), proved successful in combating deflation.

However, this characterizing of deflation as demonic is also in line with demand-side economics that believes an increase in savings is detrimental to the economy. This is obviously wrong as an increase in savings will translate into an increase in funds available for investment which would then send signals to producers and business to provide long-term items. In other words, an increase in savings, coupled with a genuine interest rate, would tell businesses to lessen supplies in items like TVs and concentrate in longer term items like manufacturing and industry. The increase in future income would then generate an increase in future spending, which Keynesians just love so much.

For more on "The Blessings of Deflation" I refer you to this informative article by Lew Rockwell.

Also, despite what the talking heads keep espousing, Bernanke himself has not ruled out future purchasing of securities, or QE3. This is crucial. As the economy continues to deteriorate, underlined by an unstable housing market, the Fed will be under more and more pressure to step in and intervene. This could probably take place later this year when the Fed meets in September, right before the holiday season, to ensure consumer spending during the holidays are somewhat acceptable macroeconomically, to Keynesians at least.

Another reason that would justify further easing is an agreement to raise the debt ceiling that does not include any REAL spending cuts while including notable tax cuts. This combination of same or greater spending by the government and a decrease in revenue can pave the way for further money printing, by way of asset purchasing, to cover the increasing debt.

Also, notable was the lack of acknowledgement of the perpetually struggling housing market. As is common knowledge, housing is a crucial element when taking into account macroeconomic forecasts. The housing crisis was the underlying element that triggered the financial crisis. But you didn't hear Bernanke give it anymore than a minute of his time when he seemed to downplay its concerns in the long run.

Bernanke also doesn't seem to appreciate the fact that there is no solving the ongoing eurozone crisis caused by the PIIGS (Portugal, Italy, Ireland, Greece, Spain). And the effects of a eurozone crisis will undoubtedly be negative globally.

So, as you can see, despite some honesty in admitting a slowdown in the economy, Bernanke still hasn't realized, or doesn't wish to acknowledge, the greater problems that still exist which will inevitably deepen the ongoing Great Recession.

No comments:

Post a Comment