In yet another long winded and self serving speech, Bernanke blames everyone but the Fed for the housing and credit bubbles. Not once did he mention interest rate policy at the Fed. However, he did blame foreign investors and “the global savings” glut for contributing to the problem.
Given there were no highlights, let’s tune into the lowlights from Bernanke’s Remarks on the economic outlook at the International Monetary Conference, Barcelona, Spain.
In the financial sphere, the three longer-term developments I have identified are linked by the fact that a substantial increase in the net supply of saving in emerging market economies contributed to both the U.S. housing boom and the broader credit boom. The sources of this increase in net saving included rapid growth in high-saving East Asian countries and, outside of China, reduced investment rates in that region; large buildups in foreign exchange reserves in a number of emerging markets; and the enormous increases in the revenues received by exporters of oil and other commodities. The pressure of these net savings flows led to lower long-term real interest rates around the world, stimulated asset prices (including house prices), and pushed current accounts toward deficit in the industrial countries–notably the United States–that received these flows.
To be sure, the large inflows of savings and low global interest rates presented a valuable opportunity to the recipient countries, provided they invested the inflows wisely. Unfortunately, this did not always occur, as an increased appetite for risk-taking–a “reaching for yield”–stimulated some financial innovations and lending practices that proved imprudent or otherwise questionable.
This brief overview makes clear that both global and domestic factors have played important roles in recent developments in the United States. The housing and credit booms were driven to some extent by global savings flows, but they also reflected domestic factors, such as weaknesses in risk measurement and management and lax standards in subprime lending.
My Comment: That brief overview makes only one thing clear: Bernanke has no idea what he is talking about. There is no savings glut. Monetary printing in China to swap Renmimbi for US dollars (so that China could keep its currency artificially low) does not constitute a “savings glut”. Nor does enormous carry trades in Japan. I have talked about the myth of the savings glut many times. Inquiring minds may wish to consider Global Savings Glut Exposed from September 2007 and Global Savings Glut Revisited from December 2006.
This nonsense is what happens when an academic meets the real world. That Bernanke cannot distinguish between monetary printing and savings is quite telling.
Inflation has remained high, largely reflecting continued sharp increases in the prices of globally traded commodities. Thus far, the pass-through of high raw materials costs to domestic labor costs and the prices of most other products has been limited, in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and will bear close attention. Futures markets continue to predict–albeit with a great range of uncertainty–that commodity prices will level out, a forecast consistent with our expectation of some overall slowing in the global economy and thus in the demand for raw materials. A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of Federal Reserve governors and Reserve Bank presidents for 2009 and 2010.
My Comment: This would be funny if it wasn’t pitiful. “A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation.” Translation: Inflation will stop once prices stop going up. Was that supposed to be a revelation? That was pathetic even for someone who thinks inflation is about prices.
However, Bernanke does not know what inflation is, and it sure is not about prices but about expansion of money and credit. Specifically, Bernanke fails to address why prices have been going up. The answer of course is monetary policy at the Fed, Congress spending money it does not have, and no fiscal discipline anywhere you look.
Unfortunately, the prices of a number of commodities, most notably oil, have continued upward recently, even as expectations of future policy rates and the foreign exchange value of the dollar have remained generally stable in the past few months. The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming.
My Comment: The idea that inflation expectations causes future inflation is more misguided nonsense. If you halt the expansion of money supply and credit, you halt inflation no matter what anyone’s expectations are.
I have a simple solution for this madness: Want To Fix The Fed? Get Rid Of It.
Mike “Mish” Shedlock
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