Friday, August 21, 2009

Bernanke: Recovery Starting...But Should We Believe Him?

Ben Bernanke said the following today:

"the prospects for a return to growth in the near term appear good,"

"Looking forward, we must urgently address structural weaknesses in the financial system, in particular in the regulatory framework, to ensure that the enormous costs of the past two years will not be borne again,"

The campaign is on to get Bernanke re-appointed, in fact, most economists want to see Bernanke re-appointed (however I believe it is more out of the fear of getting stuck with Larry Summers). I'm not convinced that Bernanke has been successful and wasn't complicit in causing the financial meltdown. Only time will tell if in fact Bernanke's moves were successful or simply delayed the inevitable (can you say Greenspan?).

I'd like to take you back to a few years ago, before the crisis really began, what was Bernanke saying then (copy of speech):

"We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,"

"vast majority of mortgages, including even subprime mortgages, continue to perform well."

If you don't believe me, watch the video below of Bernanke, Paulson and Bush.

In all fairness if you read my blog during the same time period you would not have found me predicting gloom and doom. However, you will notice that I continually stated the credit and housing foreclosure crisis was serious, not over and not being dealt with (or dealt with correctly). Of course I am also not the scholar that these men supposedly are - wasn't it their job to monitor the system and to prevent what happened?

I'm not confident in the end of the recession (actually, the end of the depression). For me, a recession doesn't end when you have 16% nationwide unemployment that continues to rise (BLS U6 stats). For me, a recession is not marked as over if the Federal Reserve is still the main lender in many credit markets (TALF). For me, the recession is not over if the Federal Reserve is continuing to monetize the debt. For me, the recession is not over when savers are punished by 0% interest rate policies. For me, the recession is not over when nine out of ten home loans are made by the federal government and the FHA is the main lender. For me, the recession is not over when you have so many homeowners being foreclosed on. For me, the recession is not over when the annual federal deficit is projected to be larger next year than this year.

The recession is over if your only measure is the stock market, up now over 50%. However, the stock market hasn't exactly been a great indicator of the future over the past decade.

We have serious issues to be dealt with that are not being dealt with. Stocks are now priced for perfection, God forbid we have any bad news, let alone a terrorist attack, a mutating deadly virus or another Katrina.

I'm an eternal optimist, however I am also a realist. Bernanke is claiming victory, I wouldn't be surprised to see a banner behind his next speech reading "Mission Accomplished". But this recovery is an illusion. It may continue for awhile and stock prices may continue to ascend into bubble territory again as more federal reserve notes are pumped into the system and as the stimulus continues to unfold - but this is not a sustainable policy.

I do not support Bernanke for Federal Reserve Chairman, maybe we should bring back Volcker!

Scott Dauenhauer CFP, MSFP, AIF