Ben Bernanke’s last official speech as chairman of the Federal Reserve was surprisingly modest and deservedly so. He also, for the record, clarified that the housing collapse was already beginning by the time he started.
His supporters sing his praises for, as they say, helping offset a deep recession. Critics, however, call him out for printing billions from thin air in a three-part, seemingly never-ending bond-buying spree that arrested interest rates artificially low but which quadrupled the size of the Fed’s assets to more than $4 trillion with a T. It looks like it didn’t help that much – the recovery is weak and the job market stagnant. And it was a plan he'd had in mind since at least 2002.
Looking to the future at the annual meeting of American Economic Association in Philadelphia on Friday, Bernanke said he thinks the worst of the economic challenges are behind, and that a slow tapering of quantitative easing along with other factors makes him optimistic.
(This video was played to introduce Bernanke at the AEA. No, really.)
Not Cutting the Cord
Bernanke said the Fed is still committed to a policy of keeping interest rates low, despite cries of other Fed chiefs to the opposite. The move that starts this month to trim to $75 billion the Fed's monthly bond buys should not be taken as a sign that the Fed plans to cut the cord.
The Fed, he said in no uncertain terms, is pledged to "maintain a highly accommodative monetary policy for as long as needed."
But he also admitted the recovery – slow in coming and weak by most measures – isn’t upon us yet. The unemployment rate remains over 7% and doesn’t take into historically unprecedented number and percentage of adults over 16 who have left the workforce because they gave up looking for jobs. Workforce participation is 63%. Meanwhile, housing is bolstered by artificially low interest rates.
"The recovery clearly remains incomplete,” Bernanke said.
Bernanke will step down Jan. 31 and Fed Vice-Chair Janet Yellen will presumably take over if there are no hitches with her Senate confirmation, scheduled for Monday night.
Stocks turned mostly higher after a down day most of Friday after Bernanke repeated that the Fed won’t be cutting the cord and will be keeping interest rates low.
Housing Was The Trigger
Looking back to the start of the current economic downturn, Bernanke put the focus squarely on the housing market.
"The immediate trigger of the crisis, as you know, was a sharp decline in house prices, which reversed a previous run-up that had been fueled by irresponsible mortgage lending and securitization practices. Policymakers at the time, including myself, certainly appreciated that house prices might decline, although we disagreed about how much decline was likely; indeed, prices were already moving down when I took office in 2006," Bernanke said. "However, to a significant extent, our expectations about the possible macroeconomic effects of house price declines were shaped by the apparent analogy to the bursting of the dot-com bubble a few years earlier. That earlier bust also involved a large reduction in paper wealth but was followed by only a mild recession."
"In the event, of course, the bursting of the housing bubble helped trigger the most severe financial crisis since the Great Depression. It did so because, unlike the earlier decline in equity prices, it interacted with critical vulnerabilities in the financial system and in government regulation that allowed what were initially moderate aggregate losses to subprime mortgage holders to cascade through the financial system," Bernanke said.
In the private sector, Bernanke said, key vulnerabilities included high levels of leverage, excessive dependence on unstable short-term funding, deficiencies in risk measurement and management, and the use of exotic financial instruments that redistributed risk in nontransparent ways.
"In the public sector, vulnerabilities included gaps in the regulatory structure that allowed some systemically important firms and markets to escape comprehensive supervision, failures of supervisors to effectively use their existing powers, and insufficient attention to threats to the stability of the system as a whole," he said.
Housing Looking Stronger
Bernanke concluded with a note of caution to any excess optimism but with a statement that he believes the housing market is getting its legs back.
"The aftereffects of the housing bust also appear to have waned. For example, notwithstanding the effects of somewhat higher mortgage rates, house prices have rebounded, with one consequence being that the number of homeowners with ‘underwater’ mortgages has dropped significantly, as have foreclosures and mortgage delinquencies. Household balance sheets have strengthened considerably, with wealth and income rising and the household debt-service burden at its lowest level in decades," Bernanke said. "Partly as a result of households' improved finances, lending standards to households are showing signs of easing, though potential mortgage borrowers still face impediments. Businesses, especially larger ones, are also in good financial shape. The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters."
But he warned: "Of course, if the experience of the past few years teaches us anything, it is that we should be cautious in our forecasts."
Click here to read the full text of Bernake’s last major speech.