“At the current moment, large deficits, as unattractive as they are, are important for restoring economic activity and stability. I would be reluctant to withdraw spending too precipitously. I would much prefer to see consolidation or cuts over the medium term as opposed to immediately.” Ben Bernanke, Statement to Senate Banking, Housing and Urban Affairs Committee, July 21, 2010
Like so many of his out-dated hydraulic Keynesian peers, Ben Bernanke is out of ideas as well as out of Federal Reserve Board remedies in attempting to treat an economic disease that he stubbornly fails to understand. By continuing to adhere to an economic model that was decisively falsified some 30 years ago, the Fed Chairman encourages economic interventions that are decidely harmful to economic recovery.
The evidence for this judgment was directly in front of the Fed Chairman in documents provided by the Fed itself, as he responded to Senate questioning. But, like the Senators, Bernanke was blind and could not see. Let me review that evidence with eyes that see and a brain that understands.
Mortgage delinquency rates for prime and near prime mortgages with adjustable rates: January 2009 – 12 per cent; May 2010 – 15 percent.
Mortgage delinquency rates for subprime mortgages with adjustable rates: January 2009 - 32 per cent; April 2010 – 42 percent.
Delinquency rates on commercial real estate loans by commercial banks: January 2009 – 10 percent; March 2010 – 18 percent.
Private housing starts, millions of units, annual rates: January 2009 – 0.5; June 2010 – 0.5
Mortgage interest rates, adjustable rates: January 2009 – 5 percent; July 2010 – 3.8 percent.
Changes in prices of single-family houses, FHFA index: January 2009 – (-) 8 per cent; June 2010 (-) 2 percent.
Changes in total bank loans, annual percentage rates: January 2009 – (-) 15 per cent; June 2010 – (-) 8 percent.
Civilian unemployment rate: January 2009 – 8.5 percent; June 2010 – 9.7 percent.
Personal saving rates: January 2009 – 5 per cent; May 2010 – 4 per cent.
Federal saving rates: January 2009 – (-) 6 percent; March 2010 - (-) 9 percent.
Federal government debt as percentage of GDP held by the public: January 2009 – 45 per cent; December 2010 - 67 percent.
Federal expenditures as percentage of GDP: September 2008 -23 percent; September 2009 – 25 percent
Federal receipts as percentage of GDP: September 2008 – 16 percent; September 2009 – 14.5 percent.
What does all this tell us about the impact of the federal government’s attempts to stimulate the national economy?
1. The stimulus monies pumped into the mortgage market and the Fed’s massive effort to lower adjustable mortgage rates have failed to revive either the private or the commercial real estate markets. In my judgment, these interventions have slowed down recovery and have depressed the level of housing starts by retarding market- clearing in these markets. In a free market, house prices would have quickly dropped to market-clearing levels as the foreclosure process accelerated.
2. The massive increase in high-powered money into the banking system has failed to stimulate bank lending. The reason for this is the bailing out of insolvent banks by the federal government and the rigging of stress tests. High-powered money is being used largely to prop up banks that remain insolvent and to provide government cover for banks that have allowed themselves to become illiquid.
3. Civilian unemployment rates have increased, not declined, as a consequence of Stimulus I and Stimulus II, primarily because of the pessimistic expectations induced by the enormous debt overhang that has been created (and the future tax implications of that debt overhang). Stimulus III, by further increasing the debt while subsidizing lengthy job searches by the long-term unemployed, is likely further to retard recovery in the jobs market.
4. The temporary tax cuts that formed part of Stimulus I and Stimulus II went primarily into household saving rather than household consumption. This was a rational response by households to an increase in non-permanent income at a time of significant reductions in private wealth.
5. The debt statistics indicate the true nightmare of the Keynesian-based error in the response by the federal government to the economic contraction. The government has slowed down the recovery rate by flushing trillions of taxpayer dollars down the toilet. History will treat this abominable behavior extremely harshly.