Ben Bernake got the good news that he gets to keep his job today. We decided to rain on his party by tracking down some of the worst of his predictions and misreadings of the economy.
Here’s the good news: Bernanke actually seems to have figured out how bad things had become by mid-2008. After the collapse of Bear Stearns, he basically stopped saying stupid things.
'Alan Greenspan, who succeeded Volcker as Fed Chairman in 1987, continued to work to stabilise inflation and inflation expectations. Under Greenspan, the Federal Reserve gradually brought core inflation down further, to about 2 per cent in recent years. The Greenspan era also saw important steps toward increased transparency at the Federal Reserve, which helped to clarify for the public the Federal Reserve's strong institutional commitment to price stability. In a sense, Chairman Greenspan had the harder sell: As an economist would say, we might expect diminishing marginal returns to inflation reduction. Yet I think subsequent events demonstrate clear benefits from the tenacity of the Fed under Greenspan. Lower inflation has been accompanied by inflation expectations that are not only lower but better anchored, so far as we can tell. Most striking, Greenspan's tenure aligns closely with the Great Moderation, the reduction in economic volatility I mentioned earlier, as well as with a strong revival in U.S. productivity growth--developments that had many sources, no doubt, but that were supported, in my view, by monetary stability. Like Volcker, Greenspan was ahead of academic thinking in recognising the potential benefits of increased price stability. Indeed, in recent years, academic research on monetary policy has caught up with the policymakers, providing new support for what I have termed the modern consensus, that price stability supports both strong growth and stability in output and employment.'
--February 24, 2006. At The centre for Economic Policy Studies and on the occasion of the 70-Fifth Anniversary of the Woodrow Wilson School of Public and International Affairs, Princeton University, Princeton, New Jersey.
'In most local markets, commercial real estate loans have performed well. Our examiners tell us that lending standards are generally sound and are not comparable to the standards that contributed to broad problems in the banking industry two decades ago. In particular, real estate appraisal practices have improved.
However, more recently, there have been signs of some easing of underwriting standards. The rapid growth in commercial real estate exposures relative to capital and assets raises the possibility that risk-management practices in community banks may not have kept pace with growing concentrations and may be due for upgrades in oversight, policies, information systems, and stress testing.
In response to these developments, the federal banking agencies have recently proposed guidance that would focus examiners' attention on those loans that are particularly vulnerable to adverse market conditions--that is, loans dependent primarily on the sale, lease, or refinancing of commercial property as the source of repayment.
I emphasise that, in proposing this guidance, supervisors are not aiming to discourage banks from making sound loans in commercial real estate or in any other loan category. Rather, we are affirming the need for each bank to recognise the risks arising from concentration and to have in place appropriate risk-management practices and capital levels.'
--March 8, 2006. At the Independent Community Bankers of America National Convention and Techworld, Las Vegas, Nevada.
'Although macroeconomic forecasting is fraught with hazards, I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come, for several reasons. First, in previous episodes when an inverted yield curve was followed by recession, the level of interest rates was quite high, consistent with considerable financial restraint. This time, both short- and long-term interest rates--in nominal and real terms--are relatively low by historical standards. Second, as I have already discussed, to the extent that the flattening or inversion of the yield curve is the result of a smaller term premium, the implications for future economic activity are positive rather than negative. Finally, the yield curve is only one of the financial indicators that researchers have found useful in predicting swings in economic activity. Other indicators that have had empirical success in the past, including corporate risk spreads, would seem to be consistent with continuing solid economic growth. In that regard, the fact that actual and implied volatilities of most financial prices remain subdued suggests that market participants do not harbor significant reservations about the economic outlook.
An alternative perspective holds that the recent behaviour of interest rates does not presage an economic slowdown but suggests instead that the level of real interest rates consistent with full employment in the long run--the natural interest rate, if you will--has declined. For example, some observers have pointed to factors that may create a longer-term drag on the growth in household spending, including high energy costs, the likelihood of slower growth in house prices, and a possible reversal of recent declines in saving rates. If these drags on the growth of spending do materialise, then a lower real interest rate will be needed to sustain aggregate demand and keep the economy near full employment. To be consistent with a lower long-term real rate, the short-term policy rate might have to be lower than it would otherwise be as well.'
--March 20, 2006. Before the Economic Club of New York, New York
'Overall, the economy is likely to expand at a moderate pace going forward. A reasonable projection is that economic growth will be modestly below trend in the near term but that, over the course of the coming year, it will return to a rate that is roughly in line with the growth rate of the economy's underlying productive capacity. This scenario envisions that consumer spending--supported by rising incomes and the recent decline in energy prices--will continue to grow near its trend rate, and that the drag on the economy from the motor vehicle and housing sectors will gradually diminish. The motor vehicle sector may already be showing signs of strengthening; after having cut production significantly in recent months in response to the rise in the inventory of unsold vehicles, automakers appear to have boosted the assembly rate a bit in November, and they have scheduled further increases for December. The effects of the housing correction on real economic activity are likely to persist into next year, as I have already noted. But the rate of decline in home construction should slow as the inventory of unsold new homes is gradually worked down.'
--November 28, 2006. Before the National Italian American Foundation, New York, New York
'We will follow developments in the subprime market closely. However, fundamental factors--including solid growth in incomes and relatively low mortgage rates--should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system'
--June 5, 2007. To the 2007 International Monetary Conference, Cape Town, South Africa (via satellite)
'The TARP's purchases of illiquid assets from banks and other financial institutions will create liquidity and promote price discovery in the markets for these assets. This in turn will reduce investor uncertainty about the current value and prospects of financial institutions, enabling banks and other institutions to raise capital and increasing the willingness of counterparties to engage. More generally, increased liquidity and transparency in pricing will help to restore confidence in our financial markets and promote more normal functioning. With time, strengthening our financial institutions and markets will allow credit to begin flowing again, supporting economic growth.'
--October 7, 2008. At the National Association for Business Economics 50th Annual Meeting, Washington, D.C.
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