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Posted by warren mosler (65.113.90.26) on 11:05:41 11/08/07
Date: Thu, 8 Nov 2007 12:00:09 -0400
Subject: Bernanke text comments
Since I last appeared before this Committee in March, the U.S. economy
has performed reasonably well. On preliminary estimates, real gross
domestic product (GDP) grew at an average pace of nearly 4 percent
over the second and third quarters despite the ongoing correction in
the housing market.
NO ACTUAL SLOWDOWN YET.
Core inflation has improved modestly, although recent increases in
energy prices will likely lead overall inflation to rise for a time.
MORE ON THIS LATER.
Since July, few securities backed by subprime mortgages have been issued.
THE DROP IN DEMAND DUE TO FEWER SUBPRIME BORROWERS HAS ALREADY HAPPENED
Prime jumbo loans are still being made to prospective home purchasers,
but they are at higher spreads and have more-restrictive terms.
HE IS SAYING THIS MARKET IS STILL FUNCTIONING. THERE WAS A CONCERN AT
THE SEP 18 MEETING THAT THIS MARKET MIGHT SHUT DOWN AND THAT
POSSIBILITY WAS ONE OF THE REASONS FOR THE 50 CUT.
To be sure, the recent developments may well lead to a healthier
financial system in the medium to long term: Increased investor
scrutiny of structured credit products is likely to lead ultimately to
greater transparency in these products and to better differentiation
among assets of varying quality. Investors have also become more
cautious and are demanding greater compensation for bearing risk.
THE FED DOESN'T WANT RISK REPRICED BACK TO 0
In the short term, however, these events do imply a greater measure of
financial restraint on economic growth as credit becomes more
expensive and difficult to obtain.
A FORWARD LOOKING CONCERN
Federal Reserve Policy Actions
At the height of the recent financial turmoil, the Federal Reserve
took a number of steps to help markets return to more orderly
functioning.
NOTE 'MARKET FUNCTIONING' AND NOT GDP CONCERNS DIRECTLY. THIS IMPLIES
WHEN MARKET FUNCTION TYPE OF RISKS SUBSIDE THE NEED FOR THE CUTS ENDS.
The Fed increased liquidity in short-term money markets in early
August through larger-than-normal open market operations.
NO COMMENT...
And on August 17, the Federal Reserve Board cut the discount rate--the
rate at which it lends directly to banks--50 basis points, or 1/2
percentage point, and subsequently took several additional measures.
These efforts to provide liquidity appear to have been helpful on the
whole, but the functioning of a number of important markets remained
impaired.
THEY ARE TOTALLY PSYCHOLOGICAL AND MAINLY ASSIST THOSE WHO DON'T
UNDERSTAND RESERVE ACCOUNTING AND MONETARY OPERATIONS.
The Committee met most recently on October 30-31. The data reviewed
at that meeting suggested that growth in the third quarter had been
solid--at a 3.9 percent rate, according to the initial estimate by the
Bureau of Economic Analysis. Residential construction declined
sharply during the quarter, as expected, subtracting about 1
percentage point from overall growth. However, the GDP report
provided scant evidence of spillovers from housing to other components
of final demand: Strong growth in consumer spending was supported by
gains in employment and income, and businesses increased their capital
spending at a solid pace. A strong global economy stimulated foreign
demand for U.S.-produced goods and services, as foreign trade
contributed nearly 1 percentage point to the growth of real output
last quarter.
DOESN'T GET ANY BETTER THAN THAT.
Looking forward, however, the Committee did not see the recent growth
performance as likely to be sustained in the near term. Financial
conditions had improved somewhat after the September FOMC action,
BETTER THAN IN Q3
but the market for nonconforming mortgages remained significantly
impaired, and survey information suggested that banks had tightened
terms and standards for a range of credit products over recent months.
In part because of the reduced availability of mortgage credit, the
contraction in housing-related activity seemed likely to intensify.
FORWARD LOOKING RISKS AGAIN.
Indicators of overall consumer sentiment suggested that household
spending would grow more slowly, a reading consistent with the
expected effects of higher energy prices, tighter credit, and
continuing weakness in housing. Most businesses appeared to enjoy
relatively good access to credit, but heightened uncertainty about
economic prospects could lead business spending to decelerate as well.
WE'VE ALL BEEN HEARING THIS FOR A LONG TIME. THIS IS NOT A CHANGE OF OUTLOOK.
Overall, the Committee expected that the growth of economic activity
would slow noticeably in the fourth quarter from its third-quarter
rate. Growth was seen as remaining sluggish during the first part of
next year, then strengthening as the effects of tighter credit and the
housing correction began to wane.
THAT FORECAST DOES NOT SUPPORT ANOTHER RATE CUT.
The Committee also saw downside risks to this projection: One such
risk was that financial market conditions would fail to improve or
even worsen, causing credit conditions to become even more restrictive
than expected. Another risk was that, in light of the problems in
mortgage markets and the large inventories of unsold homes, house
prices might weaken more than expected, which could further reduce
consumers' willingness to spend and increase investors' concerns about
mortgage credit.
YES, IF THINGS DETERIORATE SUFFICIENTLY BY THE DEC MEETING (AND
INFLATION RISKS DON'T GROW BY SAME) A CUT COULD BE IN ORDER.
The Committee projected overall and core inflation to be in a range
consistent with price stability next year. Supporting this view were
modest improvements in core inflation over the course of the year,
inflation expectations that appeared reasonably well anchored,
THOUGHT RECENTLY 10 YEAR TIPS BREAK EVENS ARE ON THE RISE
and futures quotes suggesting that investors saw food and energy
prices coming off their recent peaks next year.
THAT IS WHAT I ADDRESSED IN PREVIOUS EMAILS, AND REINFORCES THE
POSSIBILITY THEY ARE CONFUSING THE TERM STRUCTURE OF FUTURES OF
PERISHABLE VS NON PERISHABLE COMMODITIES.
SINCE ANY COMMODITY IN SHORT SUPPLY IS EVIDENCED BY BACKWARDATION, THE
FED'S MODEL IS TELLING THEM SUPPLY SHORTAGES THAT DRIVE UP PRICES ARE
DEFLATIONARY.
But the inflation outlook was also seen as subject to important
upside risks. In particular, prices of crude oil and other
commodities had increased sharply in recent weeks, and the foreign
exchange value of the dollar had weakened. These factors were likely
to increase overall inflation in the short run and, should inflation
expectations become unmoored, had the potential to boost inflation in
the longer run as well.
YES, AND UNSPOKEN IS THAT WITH A 4.7% UNEMPLOYMENT RATE THEY SEE THIS
AS ALL THE MORE LIKELY. IT IS UNSPOKEN AS SAYING THAT IN FRONT OF
THIS CONGRESS WOULD BE HIGHLY CONFRONTATIONAL.
Weighing its projections
ALL FORWARD LOOKING, WITH MODELS THAT TREAT FUTURES PRICES AS ABOVE.
for growth and inflation, as well as the risks to those projections,
the FOMC on October 31 reduced its target for the federal funds rate
an additional 25 basis points, to 4-1/2 percent. In the Committee's
judgment, the cumulative easing of policy over the past two months
should help forestall some of the adverse effects on the broader
economy that might otherwise arise from the disruptions in financial
markets
TRYING TO FORESTALL 'SPILLOVER' FROM FINANCIAL TO THE REAL ECONOMY
and promote moderate growth over time.
NOT ROBUST GROWTH- TOO INFLATIONARY AT CURRENT LEVELS OF UNEMPLOYMENT.
THEY ONLY WANT MODERATE GROWTH. THEY DON'T WANT TO CAUSE A 'BOOM.'
Nonetheless, the Committee recognized that risks remained to both of
its statutory objectives of maximum employment and price stability.
All told, it was the judgment of the FOMC that, after its action on
October 31, the stance of monetary policy roughly balanced the upside
risks to inflation and the downside risks to growth.
IN MAINSTREAM ECONOMIC THOUGHT RISKS TO INFLATION ARE RISKS TO OPTIMAL
LONG TERM GROWTH AND EMPLOYMENT. SO ANY MOVE TO ASSIST SHORT TERM
PERFORMANCE THAT ELEVATES THE RISK OF LONG TERM PERFORMANCE MAKES NO
SENSE AT ALL. THAT'S WHY MAINSTREAM THEORY FOCUSES SOLELY ON KEEPING
INFLATION IN CHECK AS THE MEANS OF OPTIMIZING GROWTH AND EMPLOYMENT
OVER THE LONG TERM.
In the days since the October FOMC meeting, the few data releases that
have become available have continued to suggest that the overall
economy remained resilient in recent months. However, financial
market volatility and strains have persisted. Incoming information on
the performance of mortgage-related assets has intensified investors'
concerns about credit market developments and the implications of the
downturn in the housing market for economic growth. In addition,
further sharp increases in crude oil prices have put renewed upward
pressure on inflation and may impose further restraint on economic
activity. The FOMC will continue to carefully assess the implications
for the outlook of the incoming economic data and financial market
developments and will act as needed to foster price stability and
sustainable economic growth.
MAINSTREAM THEORY SAYS INFLATION COMES FIRST, AND THE FED HAS ALWAYS
AGREED WITH THIS. THEY HAVE REPEATEDLY SAID THE COST OF REELING IN
INFLATION LATER IS FAR HIGHER THAN ANY COST TO GROWTH OF KEEPING
INFLATION IN CHECK NEAR TERM.
THEY ARE EITHER:
1. REINVENTING MONETARY POLICY
2. BEING LED ASTRAY BUY THEIR USE OF FUTURES PRICES
3. WILL QUICKLY RETURN FOCUS TO INFLATION
THE REST OF THE TEXT WAS ON WAYS TO ASSIST HOMEOWNERS IN TROUBLE AND
INCLUDED JUST ABOUT EVERYTHING EXCEPT FURTHER RATE CUTS.
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