Bernanke: Mr Long Run

Relax. In the long run it will all be OK. Between here and there … well now, that’s an interesting question, and one that we all ought to ponder, be sensible about, and generally discuss. The one thing we now know is that the Fed is not seriously involved in offering a solution to the near term bumps it sees ahead.

That’s about it. Bernanke’s speech this morning in the annual Jackson Hole shindig was something of a damp squib. He carefully avoided saying anything controversial, and he absolutely avoided suggesting that the Fed was going to engage in policies designed to assist us through the choppy waters we find ourselves in.

In short: the Fed is on the sidelines.

Let’s think about this for a moment.

With fiscal policy sidelined by the emergence of a veto exercised by our extreme right wing, and with austerity measures about to become a drag on growth, it is a little disheartening to hear that the other wing of our policy elite has also decided to absent itself from the fight.

We are on our own.

Having said that I was not a big fan of the Fed setting up a new QE program. Monetary policy at this point is pretty much useless, and while the stock market loved the idea – why not? all that cash would probably float stock prices up anyway – not many others saw any value in it. The entire point of a further easing would have been to nudge long term interest rates lower in order to stimulate borrowing, but rates are already very low and having little effect in the face of continued debt aversion amongst households and vast war chests of cash sitting around at our large corporations. In view of these factors monetary policy has little chance of success. Let me correct that: it has zero chance of success. So Bernanke is right to sit this one out.

This is a moment for fiscal policy, which, as I said above, is ruled out on ideological grounds. Which is absurd, but there it is.

As if to put all this in context we were treated, this morning, to the monthly update in the GDP numbers. There was no surprise. Second quarter GDP was anemic at an annualized 1.0%. Add this to the first quarter’s even worse 0.4% and the first half of this year scarcely registered growth at all. Yet Bernanke spoke of the economy being now nine quarters into a recovery. Technically correct. Substantively missing the point.

For those of you who read my forecasts will recall that I was always less upbeat than most others because of the drag I see – and still see – created by the need for households to retrench. We have made some headway towards getting the average household balance sheet repaired, but there is still some way to go. Not as far, though, as I feel it appears. The biggest current problem is no longer the repair job itself, but the fear of another round of erosion. In particular, the combined weakness in wages and the labor market create an atmosphere within which even a stable balance sheet inspires little confidence. People are still shell shocked at the decline in home values, and weak wages give them no margin for error. Consumption is less a priority than building up the ramparts to withstand another bank created shock.

So we have been lingering in a kind of no-man’s land between decline and growth. In a word: stagnation has set in. And there is no obvious motor available to power us out and back into a self-sustaining growth pattern.

Given this, I expect GDP growth to get back into the 2.0% – 2.5% range it had wallowed around in for a few quarters before the Japanese disaster and its consequent supply side shock set us back earlier this year.

To this extent I agree with Bernanke.

Where I differ is that I see nothing beyond that. I expect GDP to stick at around that pace for a while longer. The Congressional Budget Office released a new forecast this week with a projection that we would get back to our historic growth rate of between 3.0% – 3.5% by 2015. Quite what they think will give us sufficient kick to get there I don’t know. They didn’t explain, and their forecast seems to be built more on hope than a coherent view of how an economy beset by debt restructuring an de-leveraging behaves.

There’s a lot of that going around: far too many of the comments I read in the media compare this recovery with a “normal” one after a “normal” recession. This is as if the recession was in the slightest bit “normal”. It wan’t. So we should not expect the recovery to be either. And, thus far it hasn’t been. Surely this should have sunk in by now.

Meanwhile our underutilization of resources – both labor and capital – is extraordinary. We are leaving vast piles of wealth on the table never to be recaptured. One estimate is that we will lose, permanently, about $5 trillion by the time we get back on our feet. That’s a wicked waste. One that is not necessary. And one that makes the cost of a stimulus package designed to limit the damage comparatively cheap. Why our leadership doesn’t see things through that prism I cannot explain, other through recourse to a toxic combination of lack of fortitude and ideologically driven obstinacy.

Given that policy blockage I find Bernanke’s speech depressing. He spent a few words gently chiding Washington for its childish and destructive debt ceiling spat. But he spent more words on describing the halcyon days ahead after we make our way through the short term problems. He expects us, in the long run, to have experienced no permanent damage from the crisis. All will, apparently, be well.

In the long run.

But, as someone, whose name I will not utter for fear of being cast as someone who is not serious, once said: in the long run we are all dead.

It’s the short term we have to worry about. And on that Bernanke was entirely mum.

Oh well: carry on as best you can. Our policy elite will follow along behind us all. Way, way, behind us all.

As I said: we are on our own.

Addendum:

Maybe it’s just me, but I think Bernanke should focus a little more – no a lot more – on unemployment. So concerned is he not to break with the hallowed ranks of central bankers, that he scarcely mentioned jobs at all in his speech. The first reference was half way down Page 6, after he had gone through avery dull and needless reprise of the crisis. Hey: Ben, we all know what happened. What we want to know is what you are going to do about it.

What’s worse is that when he did finally warm to the task of talking about the problem of unemployment, he promptly punted the responsibility of finding a fix to Congress, knowing full well the probability of such a fix emerging from that election fevered swamp is near zero.

And having carefully avoided taking a stand, and having run on about the virtues of price stability for a page or so, he dared to end with the platitude that, and I quote:

“The Federal Reserve will certainly do all that it can to help restorehigh rates of growth and employment in a context of price stability”

Given what went before these parting words, he clearly doesn’t mean them. Indeed, I careful listener would conclude just the opposite: the Fed is doing everything it can to avoid getting involved. Just like Congress. Just like the White House.

Oh well.