Commentary: Reassurances from Fed chief sound hollow
When are investors going to stop getting suckered by Ben Bernanke?
The Dow Jones Industrial Average (^DJI - News) jumped nearly 200 points Friday after the Federal Reserve chairman's pep talk on the economy. Worldwide markets followed suit. And long-term interest rates rose on his sunnier outlook.
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Yes, the Fed chairman seemed to rule out a double dip. And yes, he said he stands ready to pump more money into the system if it should falter.
But so what?
On forecasts, the Fed chairman is about as useful as a New England weatherman.
As for the talk of more quantitative easing: A close reading of Bernanke's word's make you wonder if he even understands the crisis at all.
Let's look at the forecasts first. "I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace," Bernanke said at Jackson Hole.
Good news? Some people clearly thought so.
But this is the man who four years ago predicted a "a leveling out or a modest softening" in home prices. (He also said households were in "reasonably good" financial shape, because their booming house prices were offsetting their rising debts).
Just over three years ago he said the subprime crisis "seems likely to be contained", adding that he saw "some tentative signs of stabilization" in house prices.
As late as April, 2008, with the great implosion just months away, he forecast "a return to growth in the second half of this year and next year." You remember that return to growth we had in the fall of 2008, don't you?
Last Friday he admitted the Fed had been as surprised as everyone else by the sharp downturn in the U.S. trade balance in the second quarter. So what's new?
When the time comes to write Ben Bernanke's biography, I already have a great title. How about "Behind The Curve"?
I don't want to be unfair. He issued caveats along the way. But so he did again last week. Nothing's changed. And maybe Ben Bernanke's economic forecasts aren't any worse than anyone else's. But that's hardly the point, is it? And even if they're no worse, are they any better?
And this isn't even the biggest concern arising from Friday's speech.
Bernanke keeps talking about bank lending and consumer confidence.
But how can anyone look at the most indebted nation in the history of the world and say it is suffering from a lack of credit? And why on earth should consumer confidence miraculously pick up when those consumers are broke and out of work? Is he suggesting we start handing out Vicodin? Should we legalize pot?
Bernanke knows that the real problem with the economy is a lack of demand. "Fiscal impetus and the inventory cycle can drive recovery only temporarily," he says. For a sustained recovery, he says, "growth in private final demand — notably consumer spending and business fixed investment — must ultimately take the lead."
In the past, the bulk of this has come from the consumer. But look at the numbers. American families, according to the Federal Reserve itself, already owe $13.5 trillion. That is twice what they owed ten years ago, and four times what they owed twenty years ago. For all the talk of people repairing their balance sheets, that figure has fallen by a grand total of 2.7% from its all-time peak in 2008.
Meanwhile, the unemployment figures are far worse than the government admits. (Bernanke himself said as much. "The small decline in the unemployment rate is attributable more to reduced labor force participation than to job creation," he said. Think about that for a second if your definition of "unemployed" doesn't include those who have ceased to participate in the labor force, what use is it?).
We can find the real numbers for ourselves. The Labor Department's own data show that among adult men of prime working age, 25 to 54, just 81.2% have a job of any kind at the moment. (The figure until the crisis was nearly 90%, and back in the fifties it was around 95%).
The Labor Department further admits that a further 7% of those men are stuck working part time — a sharp increase from two years ago, due to the financial crisis.
Put the two together and you discover that 25% of men of prime working age in America, one in four, today lacks a full-time job. Nearly one in five lacks any job at all. This is unprecedented in American history.
Millions of families are broke, up to their eyeballs in debt and unemployed. And they can't get credit, because lenders are at last worrying about whether they can pay the money back. The problem in this situation is not with the lenders.
In the circumstances, I'd be more worried if someone told me consumer confidence was booming.
If the economy gets worse, will politicians be able to do anything about it? Don't bet on it. Even if our political system weren't broken, we're in an election season.
Maybe the only one left who can act is Ben Bernanke. He stands ready to help by purchasing long-term Treasurys. Will it work? We had better hope so.
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