If you’ve ever listened to statements made by the Federal Reserve (Reports to Congressional committees, speeches, official statements, etc.), you’ve probably noticed that the Fed will use language that is almost impossible to interpret. Alan Greenspan was the master at this – most economists had no idea what he was saying most of the time – never mind the average American. Most of us haven’t really been concerned by this because it all seemed too complicated – better to let the ‘experts’ handle all of this economic stuff. The problem is that the ‘experts’ are lying to us.
When times were good – nobody cared much about what the Fed had to say – we were too busy leading our lives – and for most of us – life was relatively good. Now – things are much different. People are paying attention. It’s much easier to cut through the rhetoric and see what’s actually happening – now that the economy is in freefall. Things are now getting so bad, so quickly – that there’s not a whole lot the Fed can say – or do differently to give the appearance that they’re helping. This is why Bernanke’s statements below are so telling. He is repeating the Fed mantra of lowering interest rates and adding liquidity to the financial system – and is selling these actions as something that will help the present situation. If we ignore ‘official’ statements and look at the data – it’s very easy to see that cutting interest rates – or providing liquidity – will do nothing to help the situation. Let’s look at what Bernanke is saying and compare his comments to actual data and what’s actually happening within the world’s economy. This will allow us to translate ‘Fed Speak’ into English.
‘While Mr. Bernanke pointed to “tentative improvements in credit market functioning,” he also warned “markets remain under severe strain.”’
Mr. Bernanke is trying to present us with some good news here – while also giving us the warning that credit markets are still strained. Are credit markets actually improving? No. ‘Strained’ isn’t the word I would use. The following are excerpts from an article this week by Michael Pollick.
“While the Federal Reserve and, most recently, the European Union and Bank of England are pushing down hard on the interest rates they control, many borrowers are still finding themselves in the credit-crunched situation of trying to talk a lender into making a loan.”
“Despite pulling out nearly every weapon in their arsenals — on Thursday, a bold 1.5 percentage point cut by the Bank of England that was the biggest trim in 27 years — central banks have yet to thaw the fairly frigid lifeblood of the world’s economies.”
‘”The credit markets are still a nightmare,” said Carl Ritter, chief executive of Carbiz Inc., a “buy-here, pay-here” dealership chain based in Sarasota. “If they do have money, they are holding onto it. “Everybody is very nervous,” Ritter said. From Ritter’s tote-the-note car lots to homeowners with equity lines to county governments, the news is pretty much the same.’
“If we had to go out into the market right now, absolutely we are going to face higher costs,” said Dan Wolfson, finance director for Manatee County’s Clerk of Circuit Court and Controller. “What the Treasury is trying to do is, they are trying to restart the credit market, put some liquidity back into the market, but it still hasn’t worked.”
I see nothing out there that tells me credit markets are improving. Borrowing at the Fed Discount Window is setting records.
After a relatively calm July and August – borrowing skyrocketed in September and October was even worse.
“According to DJNewswires, with interbank lending markets barely functioning and commercial paper markets nearly paralyzed, a Federal Reserve report released Thursday showed record borrowing at the discount window. Depository institutions and primary dealers, combined, averaged $367.80 billion per day in the week of October 1, nearly double the previous record daily average of $187.75 billion last week. Total borrowing increased by more than 50% to $409.52 billion Wednesday from $262.34 billion in the prior week.”
“In addition, lending through the primary credit facility, used by commercial banks, also set a record by averaging $44.46 billion per day in the latest week, versus $39.36 billion the previous week.”
We also have the added ‘problem’ that consumers are not taking on as much debt (those that still qualify) – with the economy contracting over the past few months. Everyone is now very worried about the economy – their jobs, their investments – their retirement funds – so most people now realize that taking on more debt is a bad idea in a contracting economy. What most people don’t realize – is that debt creation is required for our economy to continue to function. This is the dirty little secret that the Fed is hiding from the world.
Let’s continue reviewing Bernanke’s statements.
“U.S. Federal Reserve Chairman Ben Bernanke said Friday officials stand ready to “take additional steps” if needed to calm roiled financial markets, suggesting liquidity measures and interest rate cuts remain on the table.”
Let’s first take a look at what the Fed can do with interest rates to help this crisis. When the Fed says ‘interest rates’ – it’s talking about the Federal Funds Rate. This is the interest rate that banks charge each other for ‘overnight’ loans (from reserves at the Fed) to each other. The Fed sets a ‘target’ for this interest rate – by increasing/decreasing reserve levels (open market operations). The current ‘target’ is 1% – which means that there’s not a whole lot more that it can do. You can’t reduce the rate below zero – but this doesn’t tell the whole story. In ‘normal’ times – it’s not difficult for the Fed to maintain this rate. As you know – we’re not in ‘normal’ times – and the Fed has lost control of the actual Fed Funds Rate. The following graph shows the the actual Fed Funds Rate.
The blue line shows the actual (Effective) Fed Funds Rate. When financial markets began to get really crazy in September, the Federal Reserve lost control of this interest rate (due to all of the additional liquidity ‘actions’ by the Fed). You can see that the current Fed Funds Rate is almost 0% – not its target of 1%. So, when Bernanke tells us that the Fed is prepared to lower interest rates to help the current financial crisis – will this actually help anything? Of course not. The only thing they could do would be to lower the Fed Funds Rate to 0% – which would effectively reduce it by .11%. This would have exactly zero impact on financial markets. If you remember, Japan’s Central Bank reduced their Fed Funds Rate to 0% for five years earlier this decade (2001 – 2006) to fight deflation – and it had little impact on their economy. They are currently battling deflation again – just like the rest of the world.
Is this a mystery to Bernanke? No – he’s certainly aware of what the actual rate is – so the question becomes – why isn’t he being honest with this information? The truth is – he’s simply putting on a show until things really head south.
As I mentioned in earlier posts – while credit markets are certainly impacting the overall problem (since lending has been dramatically reduced), debt the world over is crushing the world’s ability to sustain this economic system. All the liquidity in the world doesn’t mean anything if no one wants to (or can) borrow. That’s why the following comments are nothing more than fluff. He’s trying to reassure everyone on the Titanic that we can help this by shuffling the deck chairs around a little faster. Absolutely ridiculous.
‘”For this reason, policymakers will remain in close contact, monitor developments closely, and stand ready to take additional steps should conditions warrant,” he said.’
‘In his speech Friday, Mr. Bernanke called the coordinated action taken on Oct. 8, “a strong signal to the public and to markets of our resolve to act together to address global economic challenges.”’
Mr. Bernanke also said the “credit squeeze” is a “principal cause of the economic slowdown now taking place in many countries.”
‘Unlike some of his Fed colleagues, including Richmond Fed President Jeffrey Lacker and San Francisco Fed President Janet Yellen, Bernanke has declined to characterize the current U.S. economic downturn as a recession.’
This is really getting ludicrous. There’s no other word for his statements. The leader of the most powerful financial institution on earth is either delusional or he’s simply lying to us. He doesn’t seem delusional to me – which leaves us with our answer. Take a look at recent economic indicators – and you tell me the current state of the economy.
Let’s start by looking at something that affects all of us – unemployment. Unemployment is up – payrolls are down – and the trends are definitely not good.
Since the retail sales/service sector makes up about 70% of our economy (GDP) – let’s review how this segment of the economy is doing. If you’ve been paying attention to the news recently – then you know the answer is – not good.
Retail Sales (Non-Auto) haven’t faired much better:
Commodity prices continue to slide.
Manufacturing has fallen off a cliff.
Since consumers drive 70% of our economy – how are they doing? Again – everything is heading in the wrong direction. Consumers are worried – and they’re not spending as a result.
The median price of an existing home in the U.S. is now below $200K and declining. I’ve seen no indication that the housing market is recovering.
Economic growth is falling off a cliff – around the world…..
All of this bad news continues to roil our stock markets. The DJIA traded in a 900 point range yesterday and the volatility continued today with the DJIA losing 5% this week.
If this doesn’t make you question the leadership we are receiving from our political and financial leaders – I’m not sure what will.
Bernanke and Paulson continue to give the impression that the Fed (and the Treasury) remain in control and ready to help with additional measures – when the truth is that the Fed and the Treasury don’t have any real weapons left to fight this worldwide economic decline – which is why we are seeing world leaders call for additional, coordinated ‘stimulus’ packages. Again, this doesn’t solve anything – at best, it only delays the inevitable. It will be interesting to see what comes out of the G-20 conference this weekend. Get ready for more proposals and debates on a global solution to the crisis.
jg – Nov 14, 2008
NOVEMBER 14, 2008, 8:40 A.M. ET
Bernanke Says Fed Will Act as Needed
By BRIAN BLACKSTONE
Wall St. Journal
WASHINGTON — U.S. Federal Reserve Chairman Ben Bernanke said Friday officials stand ready to “take additional steps” if needed to calm roiled financial markets, suggesting liquidity measures and interest rate cuts remain on the table.
While Mr. Bernanke pointed to “tentative improvements in credit market functioning,” he also warned “markets remain under severe strain.”
Speaking to a European Central Bank conference marking the 10th anniversary of the euro, Mr. Bernanke said “the continuing volatility of markets and recent indicators of economic performance confirm that challenges remain.” (Read the full remarks.)
“For this reason, policymakers will remain in close contact, monitor developments closely, and stand ready to take additional steps should conditions warrant,” he said.
Since the subprime mortgage meltdown started gripping financial markets in the summer of 2007, Fed officials have responded aggressively with a massive reduction in the federal-funds target rate from 5.25% in September 2007 to just 1% now.
Many economists expect the Fed to lower the fed-funds rate again when it meets next month, particularly in light of a government report last week showing a 240,000 decline in nonfarm payrolls and 0.4-percentage-point jump in the unemployment rate to 6.5%.
Fed officials have also greatly expanded the Fed’s balance sheet through credit initiatives and lending programs. Weekly data released Thursday pegged the Fed’s balance sheet at $2.2 trillion.
Last month in an unprecedented joint action, central banks around the world including the Fed, ECB, Bank of England and others lowered policy rates by one-half percentage point each. Many of those central banks have followed the reductions with additional rate cuts in the past three weeks.
In his speech Friday, Mr. Bernanke called the coordinated action taken on Oct. 8, “a strong signal to the public and to markets of our resolve to act together to address global economic challenges.”
Mr. Bernanke also said the “credit squeeze” is a “principal cause of the economic slowdown now taking place in many countries.”
Unlike some of his Fed colleagues, including Richmond Fed President Jeffrey Lacker and San Francisco Fed President Janet Yellen, Bernanke has declined to characterize the current U.S. economic downturn as a recession.
Still, the evidence is mounting that the U.S. is in a serious recession along the lines of the early 1980s. Gross domestic product slid 0.3%, at an annual rate, in the third quarter, and economists say GDP could plummet more than 3% this quarter.
The popular rule of thumb for a recession is two-straight quarterly GDP contractions. The National Bureau of Economic Research, an academic research group, makes the official call based on a series of indicators.
Write to Brian Blackstone at email@example.com