The text of Ben Bernanke’s speech to the Economic Club of NY has just come out, and at first blush it’s not a major game changer. He doesn’t, for example, go into specifics on new policy (such as what the Fed will do when Operation Twist expires at the end of the year). And he doesn’t go into too many specifics about what the Fed needs to see before it would start easing up on the gas pedal. He does hint about where the Fed would like to see unemployment settle, when he says:“Indeed, as I indicated earlier, the consensus among my colleagues on the FOMC is that the unemployment rate is still well above its longer-run sustainable level, perhaps by 2 to 2-1/2 percentage points or so.”
But that’s not a huge gamechanger.
Perhaps the most interesting part is where he talks about specifics that are holding the economy back still.
Recently, the housing market has shown some clear signs of improvement, as home sales, prices, and construction have all moved up since early this year. These developments are encouraging, and it seems likely that, on net, residential investment will be a source of economic growth and new jobs over the next couple of years. However, while historically low mortgage interest rates and the drop in home prices have made housing exceptionally affordable, a number of factors continue to prevent the sort of powerful housing recovery that has typically occurred in the past. Notably, lenders have maintained tight terms and conditions on mortgage loans, even for potential borrowers with relatively good credit.8 Lenders cite a number of factors affecting their decisions to extend credit, including ongoing uncertainties about the course of the economy, the housing market, and the regulatory environment. Unfortunately, while some tightening of the terms of mortgage credit was certainly an appropriate response to the earlier excesses, the pendulum appears to have swung too far, restraining the pace of recovery in the housing sector.
This is really the big issue that Bernanke sees. Despite the aggressive loosening of policy, there hasn’t been a willingness on the part of lenders to loosen standards.
He also spoke to the same issue a few days ago in a speech specifically on housing market/mortgage policy, but the fact that that’s carrying over to this more general speech is telling.
Addressing this is key.
Of course, Bernanke goes on to warn about the Fiscal Cliff and the debt ceiling and all that, but that’s all pretty Pro Forma.
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