interest rates

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Midweek Mash-Up

The winter blues have hit, not just in the form of a big snow storm, but also in the form of a steady drizzle of mediocre news. There is nothing much to report, so let me collect a few small items into one.

  1. House Prices: There are reports from around the country, most notably on internet real estate listing sites, that home prices are headed down again. This is after a few months of firming. This cannot be a surprise, yet it is being greeted by the financial media as an ominous sign of imminent worsening throughout the general economy. That’s not true. The cause and effect runs the other way round. It is because the general economy remains sluggish that the firming trend in home prices is giving way. I have been talking about this for months. Here’s the story: last summer and fall the housing market revived slightly because of the stimulus package – there was a ‘first time buyer’ tax credit. That brought a steady trickle of buyers onto the market at a time when they probably would not have been there without the stimulus. Demand was artificially bumped up from whatever its ‘natural’ rate was. That little boost to demand was sufficient to arrest the slide in home prices and even reverse it in some places. But the underlying, non-stimulus, price movement remained downwards. I suspect there was also a short burst of ‘pent-up’ demand – people who had money and had postponed moving while they waited to see if prices dropped some more. When these people saw prices firm they jumped into the market and bought. All that ‘pent-up’ demand does is to move the transaction from one time period to another – it does not add to total demand. With both these effects exhausted, and with aggregate demand in the economy still weak due to laggardly employment and wage experiences, there is only one way for prices to go: down again. And that’s what I expect to happen as we move into spring. Whether the normal spring surge in home buying materializes is the key factor we all now watch for. If it does prices will stop falling. If it doesn’t prices will drop throughout the year.
  2. Trade: The trade deficit widened in December. That will take a bite out of fourth quarter GDP growth, when it revised later this month, and is the most likely trend this year for trade. Our basic problem: oil imports, re-emerged as the driver of rising imports. Both the price and consumption of oil rose sufficiently to overcome a 3.3%increase in exports. Overall, imports rose by 4.8% to $189.2 billion, with crude oil imports rising 9.2% by volume and about 1.0% in price. Exports reached $142.7 billion. Our problem now is the turmoil in Europe and its knock-on effects on world trade and currency movements. Throughout 2009 trade had been a very positive factor for GDP, and now it looks very much as if that trend will flatten out if not reverse. This means that our reliance on imports could dampen growth significantly this year making GDP growth of over 2% difficult to maintain.
  3. Interest Rates: I must admit the nonsense spoken about interest rate can get tedious. All weekend long and throughout this week so far there has been talk of the Fed’s imminent release of its ‘exit strategy’. This is the magical plan that will, according to the pundits, set out the way in which the Fed undoes all the support that it gave the economy in 2008/2009. Don’t forget that to most of these pundits we are in dire danger of a massive burst of inflation due to the huge injection of cash that resulted from the Fed’s support. That overhang of cash is thought to be waiting in the wings to flood the economy and drive up prices unless the Fed can drain it beforehand. Setting aside the theoretical issues I have with this notion, the threat of inflation is so remote currently that I find it odd we even have to have this conversation. But such is the prevalence within the financial markets of the incorrect thinking underlying fears of inflation that the Fed seems compelled to announce such a plan. Guess what? Bernanke says that his concern is too little growth not much and that we will maintain low rates for the foreseeable future. Well duh! People who fear inflation have to be the same ones who imagine a rapid recovery. Since such a recovery is unlikely – I would argue it’s impossible – inflation simply will not be a problem this year or next. In fact there are still traces of deflationary pressures lingering – notably the enormous unused capacity overhang yet to be re-absorbed by growth. Until that overhang is gone businesses in most industries will have very little opportunity to pass along price increases to consumers. Therefore any price increases at the wholesale level will have to be absorbed by reducing profits. Besides I see no evidence of a boom in final, and especially consumer, demand. As Bernanke says: the threat is of too little activity, not too much. So short term rates are likely to stay flat. As for the longer term rates: the punditry is talking up the prospect of a bond market revolt over our budget deficit. If such a ‘revolt’ takes place we should see a sharp drop in demand for US bonds and hence the need to raise rates to offset that drop. So far there is no sign of such a movement. In fact US bonds are selling well. Why? Because everyone else is in the same hole. Which means that US bonds retain their relative – rather than absolute – attraction. So look for long term rates to stay where they are for a while, but also be aware that the trend will be upwards as the economy improves.
  4. GDP Growth: Lastly, I should update my forecast for the year. The last quarter of 2009 saw a sudden burst of GDP growth, most of which was due to one time effects like the inventory switch I spoke about at the end of the year. Those one time movements have all washed through the numbers and some of the more lasting trends such as the trade improvement I mentioned above are due for a downward revision. It will be no surprise if the fourth quarter figure is reduced somewhat as better data is collected. Such revisions are normal and are particularly likely at times of changes in direction. Looking forward we must all disregard last year’s odd fluctuations and ask what growth is sustainable. The answer seems to be ‘not much’. As long as consumers continue retrenching their balance sheets by reducing debts, and the drop in consumer debt loads is now the biggest in history, I see very little impetus for strong growth. Ours is a consumption economy. Indeed our entire culture is built around consumption. We are not about to change that sufficiently to alter the shape of the economy in aggregate – it will take years to instill a thrift based mentality here. So if consumption fails to ignite so does the economy. While there are signs of the severe drop in demand of 2008/2009 ending there are no signs of acceleration either. With credit markets weak as the banks rebuild capital and avoid making bad loans, with state governments cutting spending in order to balance local budgets, and with trade flattening out or even weakening, projecting GDP growth of over 2% becomes very difficult. Odd movements in inventories could occur, but the underlying economy looks set for a very slow year. So I am sticking with my forecast of 1.5% to 2.0% growth for now.

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Long Term Outlook: A National Strategy

With Obama’s conversion to fiscal conservatism now official I think we all need to take stock of the mountain he intends to climb. The problems are daunting, and any reasonable attack on them will encompass years – probably his entire term in office, even if he is re-elected.

Why is this?

The latest Congressional Budget Office forecast tells the tale. It makes for grim reading so be forewarned. Our budget is a mess and is getting worse.

The problems are not new. You have heard me go on about this before so it is refreshing to have the dispassionate and neutral voice of the CBO confirm my analysis: the real issues are deep seated and nothing to do with the recession. The bail outs and the stimulus added to the debt we have to repay, but the problems run far deeper, and are far more intractable than that. Indeed if we were only concerned about the short term issues of deficit spending in response to the crisis we would have virtually no problems to discuss. Everything would be back to normal very soon after growth re-asserted itself.

No such luck.

We have a big problem.

It started, in its current guise, with the notorious Bush tax cuts of 2001 and 2003. They are due to expire in 2012 which means that unless the law is changed there will be a very big tax increase for tax year 2012. The cynicism of the Bush law can only be fathomed by looking through the CBO report. Once the current crisis has abated and the economy has recovered we will still be running deficits in the order of 6.0% to 6.5% of GDP. That is an extraordinary number in times of peace. Only twice in our history have we run peace time deficits of that magnitude: under Reagan and then under Bush. Both ostensibly conservative, but both profoundly fiscally irresponsible.

As fiscal policy the Bush tax cuts were an unmitigated failure. The economy completely failed to benefit from them. Their stimulative impact was practically zero. Greg Mankiw, Bush’s primary economic advisor and now a Harvard professor, has tried gainfully to situate those tax cuts alongside the recent stimulus plan as being ‘Keynsian’ fiscal policy boosts. The problem Mankiw has is that all the empirical studies show tax cuts are a very weak form of stimulus.

Why is that?

Because tax cuts flow disproportionately to people with higher incomes who are far more likely to have satisfied their consumption goals in life without the extra income. So they save, rather than spend, the tax refunds. This extra saving should, according to conservative economic theory, be used to boost investment, and thus productive capacity. This new capacity should boost employment and thence wealth for all. This is the famous -and thoroughly debunked – ‘trickle down’ theory.

The reason this theory fails is because it fails to take into account that investment is only weakly linked with savings: unless the returns on new factories etc are higher than returns on other things investment doesn’t necessarily flow into new capacity. It might flow into stuff like real estate instead, as it did in the mid 2000’s. I realize that the real estate bubble created thousands of new construction jobs, so there was some stimulus, but the general argument against trickle down still holds. Especially when the 8 million jobs lost in the aftermath of the bubble bursting are taken into account.

Think of the current crisis. According to the CBO our economy is operating about 6% below capacity. No one in their right mind is building new factories with all that idle space sitting there. No amount of tax cut driven savings will create investment under such circumstances. It is far better to induce consumption than savings as a short term fix. That is the essence of Keynes. Mankiw’s loyal attempt to spin Bush policies fails under even the weakest of analysis.

A far better explanation of the Bush tax cut’s effect is that they added to worldwide liquidity and thus to volatility in the banking sector. And that heightened volatility came with no lasting benefits. Investment floundered. Jobs were scarce – recall that we added only 400,000 jobs during the entire decade even though the population grew 30 million.

In sum, the American fiscal regime for the past ten years has been both reckless and ineffective.

The account is coming due.

The CBO report sets the difficulty out with a sparse clarity that is frightening. Unless we act on the structural problems caused by the Bush tax cuts the federal deficit will never close, and thus the risk of increased volatility will remain with us permanently. Not only this but the amount of GDP allocated to paying off interest on the debt will double over the next decade.

To add to this tale of misery is the impact of the retirement of all those baby boomers. As they draw down on Social Security and Medicare those programs will take an increasing share of GDP also. Less and less will be left for other forms of expenditure or investment.

Part of the reason this problem has been hidden is the trickery introduced into the budget by Reagan when he wanted to disguise the damage his version of the trickle down theory did. He stopped reporting the Social Security budget as separate entity and rolled its ongoing surplus into the newly devastated operational budget. The combined budget was called the ‘unified’ budget which showed a very much lower deficit because the Social Security surplus offset the huge hole Reagan blew in the regular budget. All the presidents since, including Clinton and Obama, have stuck with the unified concept. So voters remain blissfully ignorant of the gap opened up by the waves of tax cuts Reagan and then Bush introduced. Instead we blame the impending widening of the deficits on the switch from surplus to deficit in the Social Security budget, while ignoring that the regular budget has been in deficit since the early 1980’s.

America is lucky that it can run a structural deficit of such size for long periods of time. The world still wants American treasury bonds as ‘safe’ investments, so the flow of funds is there to facilitate an almost permanent deficit. But the cost is growing and is masked in part by low interest rates. Even in a low rate environment the interest cost will double. What would happen if rates surged is too difficult to contemplate. Suffice to say we would be forced into a deep recession almost instantaneously.

Getting this mess fixed is no easy task and requires attacks on both sides of the ledger. Spending will have to be cut. Not held down. Cut. That means all the hallowed programs we find so alluring will have to feel the pain. As I have said before Social Security is relatively easy to fix: tweaks will do the job, we don’t need major surgery. Medicare is another story. It has to be cut. That was supposed to be the thrust of health care reform: medicare costs were reduced under even the Senate plan. But the Republicans used those cuts in cost to rally opposition. By so doing they exposed themselves as fiscal spendthrifts once more.

Defense spending also needs trimming back. This can come in part from getting out of the various Bush wars. But America has a history of relentless military expenditure. Eisenhower was right: the military industrial complex is a very powerful force in the national budget. The Pentagon has been very careful to ensure that its money is spent in a large number of Congressional districts. The resultant politicization of military spending has corroded our control over the military and its budget. Nonetheless we need to cut it back.

On the revenue side the politics are even more intense. Indeed they are probably intractable. This was, no doubt, Bush’s intention. The 2001 and 2003 tax cuts all included time limits. They expire in a few years time. This fakery is how Bush could argue that his plans allowed for the reduction of the deficit: not through economic growth, but through reversal of his own policy. We already know how hard it will be to reverse those tax cuts when they expire. The fuss over the increasing burden imposed by the Alternative Minimum Tax presages the debate over all the rest. The failure of the Reagan/Bush era to lift middle income America’s wages will now come home to roost: the middle class already feels squeezed by cost increases in education and health; it has lost wealth in home values; and has not had wage increases sufficient to keep up its expectations without incurring more debt. Yet, if we are to raise enough revenue to save the spending side of the budget from catastrophe, it will be the middle class who has to ante up.

This is not a pretty picture.

A better solution will probably have to come in the form of comprehensive tax reform. This will not be painless, but at least it can be presented as an improvement. We can take the opportunity to align incentives with more sustainable social goals: we can eliminate the tax credit for mortgage interest. This would reduce house prices and thus make housing more affordable and would raise lots of revenue. It would also bring us into line with international best practice. In return we would need to reduce tax rates and eliminate many if not most other forms of deductions. Tax rates on higher incomes would have to go up. Corporate tax loopholes will have to be closed in order to force companies to pay any tax. The Republicans argue that our corporate tax rates are the highest in the Western world and so they need cutting not raising. I would agree with that were there no loopholes. But so great are the ways in which companies can move revenues around that no self-respecting large company pays much tax. The banks can often pay none at all.

The share of total revenue generated by corporate taxes used to be very significant. But over the last thirty years, during the deregulatory frenzy that produced the crisis, that share was reduced to essentially zero. The result is that individuals bear the full brunt of the tax burden.

I understand that corporate taxes are likely to be passed on as higher prices. So be it. The alternative would be to eliminate all corporate taxes and increase even more the burden on the public. The political consequences of such a shift would be tough to predict: but I doubt there would be a positive outcome.

Finally, there is an increasing likelihood that we will need to shift the tax burden off of income and onto consumption. This makes sense from a fiscal policy point of view if we are serious about encouraging savings and getting away from being a consumption based economy. The difficulty being that a federal sales tax – which is what such a shift implies – would be very unpopular and would contribute to short term inflation.

As I said none of this is easy.

I have tried to outline the kinds of discussion we need to be having if we are serious about the national debt and about cutting those huge federal deficits that have suddenly grabbed voter’s attention. It is one thing for public opinion to have swung so strongly toward fiscal conservatism. It is another altogether for the public to be aware of what that means. It will be easy for populist politicians to rally the public behind massive cost cutting: entitlements are the target of the Republican party as they have been since the New Deal. But those entitlements underwrote the emergence of our modern middle class: they provided safety net and meant that regular workers could spend rather than save. That spending drove economic growth for most of the post war years. As outside competition built and the American competitive advantage wore away, that strategy of reliance on consumption became a liability rather than an advantage. The same is true for the way in which we fund health care. The attempt to maintain that strategy underpinned Reagan’s efforts to ignore the impact of competition and increased right wing antipathy towards ‘big government’. In turn this produced the almost nihilistic approach of the Bush years in which government was deliberately underfunded – think Katrina – and reduced in effectiveness. The next logical step for this movement would be the elimination of the New Deal safety net.

This systematic attack on the safety net has already manifested itself in the widening wealth and income inequality we see in the economy today and the undermining of the security of the middle class.

The battle we now face is not just over the budget, but over our spending priorities. Do we complete the elimination of the safety net and return to a highly bifurcated society with a sparse middle class separating a small wealthy class and a spreading poorer class? Or do we try to strike a balance?

There are costs and benefits associated with both strategies.

What we cannot do, as the CBO aptly point out, is to avoid the discussion. We need political leadership strong enough to encourage and inform the debate. Defaulting is not an option.

Am I optimistic?

What do you think?

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Poor Jobs Data

Oh well.

For most of the last couple of weeks the financial media and various Wall Street economists have been plying us all with optimistic forecasts for unemployment. This week, the argument went, would bring the first increase in payrolls for a very long time, and that would portend a very happy 2010. Even if this message was conveyed in hushed tones it was insistent and strong. Wall Street tends to see things in enormously simple and shallow terms: the level of thinking is, by and large, very poor and designed to support a sales mentality rather than illuminate us with knowledge. There are exceptions of course: Goldman Sachs has an excellent record and is worth listening to. Overall, however, the folks who inhabit the financial press and cable networks are known more for their smiles than their brains.

Nonetheless there was a general feeling that payrolls would be seen to be growing when the government reported this morning on its non-farm data.

Wrong.

Payrolls fell once again by 85,000. This disappointment is not offset by the revision to the November data which produced a very slight increase in that month. To make matters worse the drop in payrolls was spread across the economy and was not centered in any single sector.

The only conclusion we can come to is that, for all the positive signals – and there have been many – the economy is simply stuck in a much discussed ‘jobless’ growth stage. Each month that goes by in this stage adds more credence to the more pessimistic outlook I have peddling here. I just do not see the economy picking up sufficient steam to start a surge in hiring. We are reliant upon the stimulus at the moment and the private sector is stuck firmly in neutral.

This is a state of mind as much as anything else: fear that future sales will disappoint force businesses to remain cautious, and current caution implies weak future sales. This is a classic example of the Keynsian ‘paradox of thrift’. The only known way out, short of a full blown depression, is yet more stimulus to break the cycle.

So I see today’s payroll data as being a confirmation of the general outlook being put forward by the ‘pessimists’: growth will come slowly and without a surge. Jobs will continue to be hard to find. Discouraged workers will drop out of the workforce so the unemployment rate is unlikely to spike much higher – today it stayed flat at 10%. Profits will rebound on the back of lower costs, not great revenue growth. Interest rates will have to remain low because an increase would stifle growth, but keeping rates low could also inflate asset prices and destabilize the banks.

All in all an ugly time ahead. Growth that feels very sluggish, without strong employment prospects. This is an era of modesty all round. Get used to it.

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The Fed Stands Pat

There is an unusual conformity about most of the commentary surrounding the immediate economic outlook: we are in for a slow and possibly long slog out of the hole we dug for ourselves. Today’s release of the Federal Reserve’s Open Market Committee meeting minutes confirms that their view sits plumb in the middle of the already narrow range of forecasts. They, too, see the next few quarters as slow and steady. Actually, slow and unsteady may be a better description.

This of course befudddles the financial media whose only goal in life seems to be to grasp any shred of positive news and spin it into an immediate surge. Some of them even get confused over whether a decrease is an increase: this morning’s ADP report on private payrolls was that they decreased by 84,000 last month. This is much less of a decline than we have become used to over the past year or so. So much so that some media outlets blared that we have turned the corner on jobs as evidenced in the increase to be found in the ADP data.

Confused? So was I. Then again I have long ago given up on the financial media’s ability to perform even the most cursory analysis.

But back to the Fed.

The issue is now not whether the economy will recover – it will – but at what pace and whether there are enough risks that it could stall again. The consensus appears to be that growth will be much slower than we normally see after a steep recession, and that both inflation and interest rates will remain low.

No one should go planning for boom times.

I applaud the Fed for embracing the research that shows, beyond any reasonable doubt, that recoveries following a financially driven recession are always much more difficult and slow developing. There is a huge difference between such a recession and a more normal recession – one driven by an inventory cycle for instance.

In a ‘normal’ recession the immediate cause of a slump could be a sudden overshoot in production which sparks an equally sudden cutback and hence a surge in unemployment. Once supply is brought back into line with demand producers re-hire and try to re-stock quickly in order to avoid losing sales. This results in a sharp uptick in the economy before things settle back down towards a long run sustainable pace. In other circumstances it is the Fed itself who initiates the slump by raising rates in order to head off the inflation produced by an economy growing above its sustainable rate. Such ‘too rapid’ growth creates overheating in prices because resources such as labor gets to be scarce and wages rise rapidly. This floods the economy with cash which then drives up prices even more – too much money chasing too few goods.

Either way the shock that knocks the economy off its sustainable path is relatively easily dealt with and the adjustment takes only a few months. After the imbalances are overcome growth resumes with an initial burst followed by a return to normal.

A recession caused by a financial shock – the real estate bubble and the implosion of the banks is a classic example – is a very different animal. This is because of the deflationary risk, the need to undo the excessive valuation of assets, and the complicated interactions that go on between the credit and other financial markets. Critical parts of the economy, most notably the banks, need to be steadied before growth can resume at anything like its long run pace. Currency fluctuations are another common feature of a financially driven recession, with the result that trade is affected. The attempt top protect the currency can then destabilize interest rates and set in motion another round of currency problems. In short a financially created recession is a bigger mess to sort out, and very often some of the regular policy tools are ruled off limits because of their impact on the credit or currency markets.

That’s where we are now.

These kinds of crises were well described by Hyman Minsky, a disciple of Keynes. They are not described well at all in mainstream economics which has no room for banks in its models. Yes you read that correctly. Textbook economics – you may see it referred to as ‘neoclassical’ or ‘Chicago school’ economics – assumes an economy in which money is treated as an illusion or ‘veil’ behind which the ‘real economy’ of goods production and consumption exists. So mainstream theory ‘lifts the veil’ and ignores money as having much impact other than as a potential distortion to prices transmitted through the money supply – if the central bank screws up the money supply it will create inflation. Because of this attitude towards money, and its role, mainstream theory pays no attention to banks, finance or things like debt. They simply don’t exist in the purist’s models. It was Keynes who blew the whistle on this nonsense and gave money a constructive role to play in an economy through his notion of the ‘propensity to save’ and so on. Minsky then refined Keyne’s ideas and produced a fully thought through theory of financial crises. Ironically, or perhaps presciently, Minsky called the crisis stage of his model ‘Ponzi banking’. But, because the neoclassical/Chicago school came to dominate the textbooks both Keynes and Minsky were forgotten until recently.

There is no question that a Keynes/Minsky inspired legislator would advocate deregulation of banking. Far from it. Sometimes capitalism needs to be saved from itself, which is what Keynes argued.

Meanwhile back to today’s policy issues: we cannot lower interest rates because we are effectively at zero. We cannot raise them to head off inflation because the banking sector is too fragile. We have pumped enormous amounts of cash into the economy but people, and especially banks, are simply hoarding it or paying off debt rather than spending it. Our currency is declining which is good because it makes our products cheaper for foreigners to buy. But it also makes foreign goods more expensive which could fuel inflation, which we would normally head off by raising interest rates … which we don’t want to do because the banks are so weak.

Well you get the picture.

The Fed obviously grasps all this and is saying it wants to stick to its current policies for a while longer. That implies withdrawing a little from its support of the real estate market, which is already in the plan for the next few quarters, but not undoing, significantly, any of the other major supports put in place last year to avert disaster. The recovery just doesn’t look strong enough for the Fed to kick away the training wheels just yet. Maybe not at all during 2010.

So the upshot is that the Fed is standing pat. At least for now.

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Bernanke Speaks

The American Economic Association is currently having a big shindig in Atlanta. Amongst the main speakers is Ben Bernanke whose comments have, naturally, attracted much attention. Not only is he up for re-appointment at the Fed, but the Fed itself has become the target for much post-crisis criticism. What he has to say, therefore needs to be scrutinized on both counts.

I think that we get insight into whether he is worthy of his job mainly through his commentary on the causes and responses to the crisis. This was the essence of his speech.

Let’s not repeat what he said about the causes of the crisis, but rather focus on his analysis, which boils down to:

  1. Monetary policy, i.e. interest rates, were not the main cause of the housing bubble and therefore the subsequent implosion of banking.
  2. Lax regulation was.

His defense of [1] is based on the observation that low interest rates were endemic throughout the developed world and a housing bubble did not erupt everywhere. So low rates cannot be sufficient by themselves to create housing bubbles. At least this last one. This is an attempt to rebut the ‘Greenspan Bubble’ theory that holds that the prolonged loose money policy of the mid-2000’s was a primary, if not the primary, cause of the explosion in home prices. I don’t believe this. Loose money, in an economy already awash with liquidity and in no visible sign of distress, was bound to find its way into an inflationary outlet of some sort. That it didn’t manifest itself in the price of ordinary goods and services, but turned up in an asset price bubble instead, simply shifts the problem around a bit. It doesn’t eliminate the cause and effect of loose money and inflation.

Bernanke clearly sticks to the conventional wisdom that asset price and goods price inflation have different causes. Or at least he wants to rely on our willingness to overlook any connection between the years of stimulative Fed policy and the, apparently unconnected emergence of a real estate bubble. The fact that mortgages were ridiculously cheap did nothing, in Bernanke’s argument, to stimulate demand for homes.

Odd.

Moving on to [2] he suggests that the real reason the housing bubble blew up to such an extraordinary degree was that regulation was lax. This encouraged banks and other lenders to spew out an unchecked torrent of lousy loans that were bound to blow up sooner or later.

I agree that underwriting of loans was insanely dumb throughout the bubble years. There is no excuse for the sheer lunacy of some of the loans that were written. They were doomed before the ink was dry on their contracts.

The problem is that the Fed is a primary regulator. It should have stopped the lunacy before it got out of hand, especially at the very largest banks who are under the Fed’s closest supervision. So having shifted the blame away from the Fed’s policy arm, Bernanke simply pushes it onto the regulatory arm. Moreover he still doesn’t see regulation as a consumer protection activity he sees it as a bank protection activity. His entire prescription for improvement contains scant reference to tightening up consumer protection – about one sentence – whereas the need for ‘systemic risk’ regulation gets tons of attention.

The Fed is our main defender of consumers, especially in real estate, yet its boss glides swiftly beyond defending us from rotten underwriting, straight to the latest glitzy regulatory gimmick. And let’s not forget that he has consistently opposed the establishment of a financial consumer protection agency: an organization that may well have prevented the worst lapses of the financial industry’s orgy of dumbness.

I understand that systemic risk management is an important topic. I have reservations about its practicality and efficacy – just how will we measure and control it? – and I don’t think it was a primary cause of the underwriting debacle. It came to the surface later in the cycle, when the interconnectedness of the major banks was exposed as they all palmed toxic assets off to one another. Plus: as far as I know our regulators had all the tools they needed to rein in the banks. The problem is that they didn’t use those tools. They were either afraid to, or they were prevented by the bank’s obfuscation and political clout from doing their job. So by emphasizing systemic risk regulation and management in his comments as the ‘big lesson learned’ Bernanke seems to miss the main point.

If his comments are an accurate reflection of the Fed’s current thinking on the crisis then we haven’t learned as much as I would have hoped. He offers little by way of concrete action and less by way of deep understanding. This was more a politician’s speech than an economist’s. That isn’t surprising as he lobbies to be re-appointed, but given our circumstances and the ongoing urgent need to control the banks his speech strikes me as oddly light.

I rate it as weak.

Which adds to my growing opposition to his re-appointment.

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