Posts filed under “Think Tank”
As a bull on the reflation trade for most of this year (started in earnest when Bernanke ramped up QE on March 18th when the FOMC announced they were going to start buying US Treasuries as I thought the Fed will now stop at nothing to create inflation), I’m now wondering whether Bernanke’s comments about…Read More
Chairman Ben S. Bernanke
At the Economic Club of New York, New York, New York
November 16, 2009
On the Outlook for the Economy and Policy
When I last spoke at the Economic Club of New York a little more than a year ago, the financial crisis had just taken a much more virulent turn. In my remarks at that time, I described the extraordinary actions that policymakers around the globe were taking to address the crisis, and I expressed optimism that we had the tools necessary to stabilize the system.
Today, financial conditions are considerably better than they were then, but significant economic challenges remain. The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible. Nevertheless, I think it is fair to say that policymakers’ forceful actions last fall, and others that followed, were instrumental in bringing our financial system and our economy back from the brink. The stabilization of financial markets and the gradual restoration of confidence are in turn helping to provide a necessary foundation for economic recovery. We are seeing early evidence of that recovery: Real gross domestic product (GDP) in the United States rose an estimated 3-1/2 percent at an annual rate in the third quarter, following four consecutive quarters of decline. Most forecasters anticipate another moderate gain in the fourth quarter.
How the economy will evolve in 2010 and beyond is less certain. On the one hand, those who see further weakness or even a relapse into recession next year point out that some of the sources of the recent pickup–including a reduced pace of inventory liquidation and limited-time policies such as the “cash for clunkers” program–are likely to provide only temporary support to the economy. On the other hand, those who are more optimistic point to indications of more fundamental improvements, including strengthening consumer spending outside of autos, a nascent recovery in home construction, continued stabilization in financial conditions, and stronger growth abroad.
My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds–in particular, constrained bank lending and a weak job market–likely will prevent the expansion from being as robust as we would hope. I’ll discuss each of these problem areas in a bit more detail and then end with some further comments on the outlook for the economy and for policy.
Bank Lending and Credit Availability
I began today by alluding to the unprecedented financial panic that last fall brought a number of major financial institutions around the world to failure or the brink of failure. Policymakers in the United States and abroad deployed a number of tools to stem the panic. The Federal Reserve sharply increased its provision of short-term liquidity to financial institutions, the U.S. Treasury injected capital into banks, and the Federal Deposit Insurance Corporation (FDIC) guaranteed bank liabilities. The Federal Reserve and the Treasury each took measures to stop a run on money market mutual funds that began when a leading fund was unable to pay off its investors at par value. Throughout the fall and early this year, a range of additional initiatives were required to stabilize major financial firms and markets, both here and abroad.1
The ultimate purpose of financial stabilization, of course, was to restore the normal flow of credit, which had been severely disrupted. The Federal Reserve did its part by creating new lending programs to support the functioning of some key credit markets, such as the market for commercial paper–which is used to finance businesses’ day-to-day operations–and the market for asset-backed securities–which helps sustain the flow of funding for auto loans, small-business loans, student loans, and many other forms of credit; and we continued to ensure that financial institutions had adequate access to liquidity. Additionally, we supported private credit markets and helped lower rates on mortgages and other loans through large-scale asset purchases, including purchases of debt and mortgage-backed securities issued or backed by government-sponsored enterprises.
Partly as the result of these and other policy actions, many parts of the financial system have improved substantially. Interbank and other short-term funding markets are functioning more normally; interest rate spreads on mortgages, corporate bonds, and other credit products have narrowed significantly; stock prices have rebounded; and some securitization markets have resumed operation. In particular, borrowers with access to public equity and bond markets, including most large firms, now generally are able to obtain credit without great difficulty. Other borrowers, such as state and local governments, have experienced improvement in their credit access as well.
However, access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, and the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices shows that banks continue to tighten the terms on which they extend credit for most kinds of loans–although recently the pace of tightening has slowed somewhat. Partly as a result of these pressures, household debt has declined in recent quarters for the first time since 1951. For their part, many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms.2 The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further.
Fed Pres Fisher is also speaking on the economy today and the Federal Reserve and one comment specifically stands out. He said that a goal of the Fed is to maintain the purchasing power of the US dollar. To quantify the success of this or lack thereof, one should look at the rate of increase…Read More
Outside of talking about the economy, the improved financial conditions with still “significant” challenges remaining and the labor market, he actually talks about the US$ in his discussion about inflation. He concludes that “inflation seems likely to remain subdued for some time,” the same wording we saw in the last FOMC statement but today he…Read More
With some markets and many economic data points back to levels last seen in Sept ’08, the Baltic Dry Index is just shy of joining the club. It’s up today for a 13th straight day by another 2.7% and at 4220, is just 71 points from the highest since Sept 24th, 2008. It is now…Read More
Like right out of the movie “Groundhog Day,” Phil Connors wakes up on Monday morning (any morning in the movie) that greatly resembles last Monday where government officials say the stimulus spigot will remain wide open, the US$ weakens and markets rally. Last weekend the G20 kept the green light on and this weekend was…Read More
David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from…Read More
Category: Think Tank
“Words from the Wise” this week comes to you in a shortened format as I do not have access to my normal research resources while on the road in Europe. Although very little commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.
While the Dow Jones Industrial Index and other benchmark indices reached 52-week highs last week and pleased Wall Street, the cartoonists reminded us that worrisome economic issues remained in Main Street …
Source: Jeff Parker, Comics.com, November 11, 2009.
The past week’s performance of the major asset classes is summarized by the chart below – a mixed bag, so to speak, with government bonds, equities, corporate bonds and gold closing the week in positive territory.
A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below. With the exception of only a few indices – notably the Japanese Nikkei Dow that recorded a third consecutive down week – most global stock markets made headway last week, adding to the gains for the month.
Category: Think Tank