Bernanke's State of the Economy Speech: "You are all Dead Ducks"

February 16, 2008

***BY MIKE WHITNEY***

Even veteran Fed-watchers were caught off-guard by Chairman Bernanke's performance before the Senate Banking Committee on Thursday. Bernanke was expected to make routine comments on the state of the economy but, instead, delivered a 45 minute sermon detailing the afflictions of the foundering financial system. The Senate chamber was stone-silent throughout. The gravity of the sitution is finally beginning to sink in.

For the most part, the pedantic Bernanke looked uneasy; alternately biting his lower lip or staring ahead blankly like a man who just watched his poodle get run over by a Mack truck. As it turns out, Bernanke has plenty to worry about, too. Consumer confidence has dropped to levels not seen since the 1970s recession, real estate has gone off a cliff, credit-brushfires are breaking out everywhere, and the stock market continues to gyrate erratically. No wonder the Fed-chief looked more like a deck-hand on the Lusitania than the monetary-czar of the most powerful country on earth.

Bernanke's prepared remarks were delivered with the solemnity of a priest performing Vespers. But he was clear, unlike his predecessor, Greenspan, who loved speaking in hieroglyphics.

Bernanke:

As you know, financial markets in the United States and in a number of other industrialized countries have been under considerable strain since late last summer. Heightened investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates, triggered the financial turmoil. However, other factors, including a broader retrenchment in the willingness of investors to bear risk, difficulties in valuing complex or illiquid financial products, uncertainties about the exposures of major financial institutions to credit losses, and concerns about the weaker outlook for the economy, have also roiled the financial markets in recent months.”

Yes, of course. The banks are ailing from their subprime investments while Europe is sinking fast from $500 billion in unsellable asset-backed garbage. The whole system is clogged with crappy paper and deteriorating collateral. Now there are problems popping up in auction rate sales and the normally-safe municipal bonds. The whole financial Tower of Babel is cracking at the foundation.

Bernanke continues:

Money center banks and other large financial institutions have come under significant pressure to take onto their own balance sheets the assets of some of the off-balance-sheet investment vehicles that they had sponsored. Bank balance sheets have swollen further as a consequence of the sharp reduction in investor willingness to buy securitized credits, which has forced banks to retain a substantially higher share of previously committed and new loans in their own portfolios. Banks have also reported large losses, reflecting marked declines in the market prices of mortgages and other assets that they hold. Recently, deterioration in the financial condition of some bond insurers has led some commercial and investment banks to take further markdowns and has added to strains in the financial markets.

Bernanke sounds more like an Old Testament prophet reading passages from the Book of Revelations than a Central Banker. But what he says is true; even without the hair-shirt. The humongous losses at the investment banks have forced them to go trolling for capital in Asia and the Middle East just to stay afloat. And, when they succeed, they're forced to pay excessively high rates of interest. The true cost of capital is skyrocketing. That's why the banks are protecting their liquidity and cutting back on new loans. Most of the banks have also tightened lending standards which is slowing down the issuance of credit and threatens to push the economy into a deep recession. When banks cramp-up; the overall economy shrinks. It's just that simple; no credit, no growth. Credit is the lubricant that keeps the capitalist locomotive chugging-along. When it dwindles, the system screeches to a halt.

"DOWNSIDE RISKS TO GROWTH HAVE INCREASED"

Bernanke again:

In part as the result of the developments in financial markets, the outlook for the economy has worsened in recent months, and the downside risks to growth have increased. To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so. The virtual shutdown of the subprime mortgage market and a widening of spreads on jumbo mortgage loans have further reduced the demand for housing, while foreclosures are adding to the already-elevated inventory of unsold homes. Further cuts in homebuilding and in related activities are likely.....Conditions in the labor market have also softened. Payroll employment, after increasing about 95,000 per month on average in the fourth quarter, declined by an estimated 17,000 jobs in January. Employment in the construction and manufacturing sectors has continued to fall, while the pace of job gains in the services industries has slowed. The softer labor market, together with factors including higher energy prices, lower equity prices, and declining home values, seem likely to weigh on consumer spending in the near term.

So, let's summarize. The banks are battered by their massive subprime liabilities. Housing is in the tank. Manufacturing is down. Food and energy are up. Unemployment is rising. And consumer spending has shriveled to the size of an acorn. All that's missing is a trumpet blast and the arrival of the Four Horseman.
How is it that Bernanke's economic post-mortem never made its way into the major media? Is there some reason the real state of the economy is being concealed from 'we the people'?

Bernanke continues:

On the inflation front, a key development over the past year has been the steep run-up in the price of oil. Last year, food prices also increased exceptionally rapidly by recent standards, and the foreign exchange value of the dollar weakened. ...(If) inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank's policy flexibility to counter shortfalls in growth in the future.

Right. So, if the Fed's rate-cutting strategy doesn't work and the economic troubles persist (and prices continue to go through the roof) then we're S.O.L. (sh** out of luck) because the Fed has no more arrows in its quiver. It's rate cuts or death. Great. So, we can expect Bernanke to hack away at rates until they're down to 1% or lower (duplicating the downturn in Japan) hoping that the economy shows some sign of life before it takes two full wheelbarrows of greenbacks to buy a quart of milk and a few seed-potatoes.

Sounds like a plan!

We don't blame Bernanke. He's been remarkably straightforward from the very beginning and deserves credit. He's simply left with the thankless task of mopping up the ocean of red ink left behind by Greenspan. It's not his fault. He should be applauded for dispelling the decades-long illusion that a nation can borrow its way to prosperity or that chronic indebtedness is the same as real wealth. It's not; and the bill has finally come due. [Elaine: This is not correct. Bernanke has always been a big fan of dropping rates all the time to protect stock market values and ignoring inflation...this is why he was selected. He is a Greenspan spawn.]

Of course, now that the low-interest speculative orgy is over; there's bound to be a painful unwind of hyper-inflated assets, falling home prices, tumbling stock markets, increased unemployment, and a generalized credit-contraction throughout the real economy. Ouch. Who said it was going to be easy?

Bernanke's summation:

At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt....It is important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further.

(Editor's translation) "Discount everything I've said here today if the economy blows up---as I fully-expect it will---from decades of regulatory neglect and the myriad multi-trillion dollar Ponzi-schemes which have put the entire financial system at risk of a major heart attack".

Bernanke's candor is admirable, but it is little relief for the people who will have to soldier-on through the hard times ahead. Perhaps, next time he could spare us all the lengthly oratory and just forward a brief cablegram to Congress saying something like this:

"We are deeply sorry, but we have totally fu**ed up your economy with our monetary hanky-panky. You are all in very deep Doo-doo. Prepare for the worst."

our sincerest regrets,

the Fed

[Elaine: I'm afraid I have to say something here. I have been battling these guys most of my life. Bernanke is a liar. Especially when he pretends to be speaking frankly, with 'candor'.

Neither Greenspan nor Bernanke have been 'candor' candidates. They have to admit to the most obvious signs of their messes but neither man will fez up to their own personal responsibilities here. Far from it. Nor do they connect all the financial and economic forces that are whipsawing the US. They love to dwell on only one or two points. Certainly, there was no mention about the need to take down, physically, all the pirate islands and offshore hell holes, for example. Nor was there any mention about the role wars play in our economic distresses here.

Indeed, they never mention the 'carry trade' and Japan's role in all this which means they are continuing to COVER UP EVERYTHING IMPORTANT. Even idiots know we are in a housing collapse. But few understand how all the derivatives grew like mushrooms in a wet clime. That is due to the carry trade and that is the anvil hanging over all our heads, not homeowners unable to pay their itty bitty loans. These loans from Japan are in the trillions of dollars and held by mostly 6 big organizations---like Goldman Sach, Merrill Lynch, Deutsche Bank, Societie Generale, etc. None of the big issues concerning the collapse of SOMA were discussed in detail, either. Instead, Bernanke thinks this sector is 'under control'.

That is pure insanity. And Congress sat there, silent? They should all have slit their bellies in a mass hari kari! They are part of the problem! They passed one wild Iraq War spending bill after another! Endlessly! Arrest them all! And arrest Bush and Bernanke. They are all traitors.]

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Comments

[Jim B]

Of course Bernanke is a provaricator, ever read the history of the Federal Reserve? What doth one expect?

[Elaine Meinel Supkis]

Correct. Long time readers know that when most everyone was praising Bernanke when he came into office, I was screaming bloody murder. I read his stuff in the past and saw where he was coming from. He is a crazy monetarist.

[capastorm]

Here's a funny cartoon explaining the subprime crisis....

http://docs.google.com/TeamPresent?revision=_latest&fs=true&docID=ddv7hj34_03774hsc7&skipauth=true

[henni]

Elaine, greetings from the class (and to Mike too!)

The students proposed the following question:

Ok, so if we accept the value of present-day indebtedness (value=currently reported net assets minus liabilities and write-downs) for all financial entities, banks, foundations, companies and hedge funds et al... what is preventing a clean slate start?

When countries have been in a similar situation in the past, monetary authorities, IMF, UN have proposed and successfully implemented declarations that effectively cancels out all debts and receivables and everyone starts over from Zero. Granted, this is an oversimplified example, but kindly follow the throught process here.

Even individuals can forgive transactions between private or commercial parties and this allows all parties to resume operations from a new baseline.

This would allow for all the uncertainty to evaporate as there would be no more coming clean or it would be like a truth commission similar to crimes committed against racial or ethnic groups (S.Africa) where your crimes are forgiven as long as you come clean and everyone goes home (not prison) at the end of the day and does not continue to commit crimes nor is vengeance exacted by wronged parties.

Could it be done?

[Carlos]

“We Have Met the Enemy and He Is Us” – I don’t see the citizenry of the US taking responsibility for creating what is, in essence, a glorified debt kiting scheme.

“The combat and instability would continue because its real source was the political contract struck between democracy and capital back in 1913, the implicit decision that democratic politics could not be trusted to act responsibly in the national interest. Therefore, the authority and responsibilities of elected politicians were permanently curtailed. Put another way, the elected government was allowed to be permanently irresponsible – free to indulge its own follies and protected from the accountability by the higher authority, the non-elected central bank. The creation of the Federal Reserve represented a great retreat from democratic possibilities. The maturing of self-government was forever stunted.” Pg. 534, Secrets of the Temple – How the Federal Reserve Runs the Country, William Greider, Simon and Schuster, 1987

AND my studies suggest the Fed will be dismantled or substantially transmogrified in 2009

[Pete McLaughlin]

Elaine
What is the Fed endgame? How will the owners of the Fed end up still solvent and powerful after the US citizens are in poverty?

Thanks
Pete

[Elaine Supkis]

You are all right. Except of course, we all must also remember two things: bankrupt EMPIRES cause world wars. And escaping our debts means the total collapse of the business of the US eating up 25% of world resources. Sizing down to only 12% will be very painful. We are 3% of the population of the world and sizing down to THAT is monumentally painful.

[MJ Hollingum]

Protocols for Economic Collapse including the USA declaring force majeure.

I found this at the above url, but don't know its origins. Yours comments about bankrupt empires are very pertinent.

[MJ Hollingum]

http://www.housepricecrash.co.uk/forum/index.php?showtopic=68465

forgot linky, sorry

[Pluto]

[slightly off topic] Elaine -- I don't think Bosch's painting details have been used with such effectiveness since he painted them. Terrific art direction!

[Elaine Supkis]

I don't have photoshop on my new computer and photoshop on my old one is very bad shape now and hard as hell to use. I hope to have a new photoshop up soon at the new computer and thus, able to use my cartooning skills to the full again.

Meanwhile, that genius of the 1500s fills the bill. Bosch is a great artist and in this one painting, has probed all the future possibilities of fantasy. I love him dearly.

[Elaine Supkis]

Henni, by the way, small nations going bankrupt cause little ripples. Big empires cause tsunamis when they go bankrupt.

World girdling empires cause world girdling depressions/wars and other horrors. The US is most certainly in that very tiny category of 'giant empires'. Indeed, we are possibly the biggest empire, since we are also all of NATO and of course, England. So this is most of the earth.

[mock turtle]

ha ha ha ha ha

you think all is out of control

all goes according to plan

america has lived way beyond it's means ...less than 10% of the worlds population consuming more than 3/4ths the worlds resources.

and who among us...what elected officials want to belly up to the microphone and tell the american people it is time to sacrifice, save, buy victory bonds, pay down debt, live in a sustainable rather than a debt laden and over-growth society.

the rabble would scream and scratch their eyes out

it is morning in amercia, remember?

best way to defeat the terrorist is to shop, remember?

mondale proposed 50cent gas tax and alternative fuels research and was excoriated, remember?

yes folks. this is not banking gone haywire. this is THE plan. America will shrink its insatiable appetite to consume all, but no leaders will have to bear the bad news... no.

instead the money changers at the temple have been allowed to run wild to excess and gorge themselves one last time, until collapse... one last great roman orgy, and then the pograms will begin.

lets see who shall they blame this time...what nationality, what immigrants, what culture or religion? don't worry we will find our untermenchen. and God help them for nature hath no fury like a fat bald guy deprived of his hdtv and beer. or a gen x er deprived of hip hop and bling. or a nerd deprived of their tera-byte mp3 and ecstacy.

so please, stop you bellowing about how it is all "off the hook" and outta control.

the Illuminati are prepared for the next step

[Elaine Meinel Supkis]

Quite the contrary, the stupid Illuminati are FOOLS who though their little Titanic would not sink. So they plowed right into the ice fields and now we are sinking.

Human folly is the topic of much of the humor in Madame History's daily readings. She writes as history unfolds and laughs all the while.

Do note that these rulers have crashed repeatedly. When there were many more 'royals' previous to 1914, after 1920, there were far, far fewer.

And this is the fact of life; the rulers FAIL. More than once! Often, very spectacularly. They are hoist on their own pertards more than once.

[Chris]

Re: Big Empires. Aye I thought that today. Seems not only Dinosaurs grow too big. Gigantism seems to be a problem with human colonies too. And the ones we call Empires are far too big now. So big when they become troublesome it is almost impossible to deal with them. And they are consuming too much resources. Mother Nature surely will have the last laugh.

[DeVaul]

I believe the original name for the Titanic was supposed to be "The Gigantic", but they changed their minds later.