Here is an easy way for any non-economist to tell whether an economy is in dire straits: If investors are looking to their central bankers to get them out of the mess created by over-borrowing, ineffective regulation, and political paralysis. Markets unwilling to lend money at reasonable rates? No problem. Federal Reserve Board chairman Ben Bernanke, Bank of England governor Sir Mervyn King, and European Central Bank president Mario Draghi will drive interest rates down. Banks with near-worthless assets included on their balance sheets as if they could be sold at face value? No problem. Your central banker will go along with the fiction. Mortgage rates too high to get the housing sector back to health? Don’t worry, be happy. Your central banker will try to offset banks’ tighter credit standards by buying up mortgages to keep rates down.
Of course, if you are a saver rather than an over-borrowed consumer, you should not be happy, and should worry, because your savings and pension accounts will earn interest rates so low that inflation will push them into negative territory. And if your range of vision takes you beyond the next day’s share trading, you might worry that some of that money being printed might end up in the bushel basket in which you will tote it to the grocer. Well, not quite: such visions of history repeating itself are still confined to Germany—and, of late, Argentina. But you are entitled to view with more than a little skepticism central bankers’ claims that if they see the inflation genie gaining strength, they will know how to keep it in its bottle. In Paper Promises, Philip Coggan notes in his detailed survey of the history of monetary policy, “Paper money systems have always led to rapid inflation in the past.”
If we ever needed a lesson in the dangers of relying on central bankers to right stricken economies, we are getting one now. In the week now ending, America’s financial markets in essence paused, waiting to hear what Bernanke was planning to do to get an economy that grew at an annual rate of a mere 1.7 percent in the second quarter moving at a rate that would give the 23 million Americans in need of full-time work a better chance at finding jobs. Focus on the Fed distracts from attention to the underlying problems of excessive deficits, a tax system that is forcing companies to relocate overseas (10 public companies have already done so, several saving over $100 million per year in taxes), and a labor market that now contains millions whose skills have atrophied or are no longer relevant to a globalized economy.
Perhaps the strangest aspect of waiting for Bernanke is this: When the economic news is bad enough, Bernanke eases, and the bad news ends up driving up asset prices. But when the economic news is on the bright side, he sees no need to ease, resulting in a fall in the price of shares and other assets.
Perverse effects such as this, plus concern that the Fed cannot simultaneously meet its dual mandates—full employment and price stability—led Republicans, in convention assembled, to establish a committee to ponder three reforms: returning to the gold standard, dropping the full employment mandate, and instituting congressional “audits” of Fed monetary policy. If Congress does pass legislation giving it power to audit monetary policy, Bernanke will leave office 17 months from now with an unwanted legacy: the man who ended Fed independence.
In the event, Bernanke argued in his Jackson Hole speech that the Fed’s monetary policy has “provided significant help for the economy,” promised to act to promote growth as needed, and suggested that he favors keeping rates low for a longer time than so far announced. He also expressed disappointment at the rate of improvement in the labour market, and promised to “provide additional policy accommodation [read, “easing”] as needed to promote a stronger economic recovery,” one that will drive the unemployment rate down by about two percentage points from its current level of 8.3 percent.
Still, no announcement of easing just yet. Bernanke played Bumble to the please-sir-I-want-some-more-easy-money-now crowd. They came away with their begging bowls empty, and will have to wait for the September 12-13 meeting of the Fed’s monetary policy committee for another portion of easing, by which time the committee will have available to it next Friday’s jobs report.
Draghi, meanwhile, skipped Jackson Hole because of “a heavy workload,” presumably to result in an announcement of “exceptional measures” at this coming Thursday’s meeting of the ECB governing council. He is hoping that German chancellor Angela Merkel, with Germany’s history of the devastating effects of inflation still very much in her mind and those of her voters, will have been refreshed by her trip to China, and more willing to consider letting the ECB buy sovereign bonds. After all, being received as the leader of Europe by her Chinese counterparts is a lot more fun than meeting with eurozone seekers-after-her-nation’s-money, and considerably more gratifying than persuading Greeks to keep their promises, the French to cede control over their fiscal policy, and contemplating the return to power of Italy’s Silvio Berlusconi. Draghi’s hope is that opposition from the Bundesbank will fade as the eurozone recession bites into Germany’s exports, and the nation’s banks press for a bit—only a bit—of inflation to shore up the value of their assets.
Bernanke has one major advantage over King and Draghi, his British and European colleagues. They are presiding over economies in recession, with no recoveries in sight. The Fed chairman has just received a report informing him that “Reports from the twelve Federal Reserve Districts suggest economic activity continued to expand gradually in July and early August across most regions and sectors.” Mitt Romney and Barack Obama will have noticed that growth was slowing or slowest in the Philadelphia, Chicago and Richmond districts—containing the swing states of Pennsylvania, Illinois, and Virginia, respectively.
As has been true for several months, the recovery in the housing sector, although not as rapid as Bernanke would have it, is encouraging. The Fed survey reports, “Real estate [property] markets were generally said to be improving. On the residential side, all 12 Districts cited increases in home sales, home prices, or housing construction. Reports on commercial real estate were also generally positive.”
Home prices topped year-ago levels in June for the first time since a short-lived uptick in 2010. The well regarded S&P/Case-Shiller Home Price Index reports price increases of 1.2 percent over last June and 2.2 percent over the last quarter. Bernanke’s low mortgage rates get some credit—they are encouraging investors to buy thousands of foreclosed properties, fix them up, and convert them into rentals, contributing to a reduction in the inventory of unsold homes. Unfortunately, in the recent past, spring and summer cheer in the housing sector has more often than not turned to gloom as winter hit, so the Fed’s forecasters just do not know whether the flowers that bloom in the spring breathe promise of a merry winter.
Consumers certainly don’t think so. The various indices of consumer confidence differ on some points, but agree that consumers’ view of the outlook and their prospects have darkened considerably. “Consumers were more apprehensive about business and employment prospects,” said Lynn Franco, who oversees the Conference Board index. That bodes ill not only for home sales in the coming months, but for retailers who are stocking up for the Christmas season. So add builders and retailers to those who are hoping that Bernanke will soon come down on the side of still another round of quantitative easing. My guess is that Bernanke’s concern with the social costs of joblessness is pushing him to grant their wish.
Let me wish all of you a delightful Labor Day weekend. Forecasts are that 33 million of you will brave $4 gasoline to take to the road in this blessed interval between party conventions, and on your return can choose to watch the Democrats, the tightening pennant races (go Nats, go Yanks), and/or the opening of the NFL season.