Bernanke Reflects on Crisis, Reitereates "Leveling Out", Reminds of Slow Recovery

Stabilization from the worst global financial crisis since the 1930s appears to be underway, and though new activity may be slow in its early stages, noteworthy progress has already been made, said Ben Bernanke, chairman of the Federal Reserve.

“After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,” the chairman said at an annual conference in Jackson Hole, Wyoming.

Bernanke was however quick to point out that improvement in the labor market may still be some time off, with “unemployment declining only gradually from high levels.” Most analysts believe the 9.4% unemployment rate will move into double-digits by early 2010.

This is Bernanke’s fourth year speaking at the Kansas City Fed’s Annual Economic Symposium, and much of his speech was a reflection on how much has happened to the economy since his keynote address last year, which took place just weeks before the fall of Lehman Brothers, an event that sparked panic across borders.

“Since we last met here, the world has been through the most severe financial crisis since the Great Depression,” he said. “The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge.”

Speaking about the housing market situation 12 months ago, he said: “Ongoing declines in residential construction and house prices and rising mortgage defaults and foreclosures continued to weigh on the U.S. economy, and forecasts of prospective credit losses at financial institutions both here and abroad continued to increase.”

To see just how much has changed, one only had to look at housing data that was released while Bernanke spoke. Sales of Existing Homes soared by 7.2% in July, marking the fourth straight increase and pushing the annualized pace of sales to 5.420 million, the highest rate in almost two years.

Looking back, Bernanke said the crisis could have been “decidedly worse” if policymakers didn’t respond to the debacle as quickly as they did, or if they had acted with less coordination.

Going forward, Bernanke listed multiple concerns that will keep the jobless rate high and the pace of recovery slow. “Strains persist in many financial markets across the globe, financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit.”

Adding, “Because of these and other factors, the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.

Insofar as policy is concerned, he said structural weaknesses in the financial system, in particular in the regulatory framework,  needed to be reformed to avoid similar problems in the future.

“The role of liquidity in systemic events provides yet another reason why, in the future, a more systemwide or macroprudential approach to regulation is needed,” the Fed chairman said. 

Key Quotes:

Bernanke on What Could Have Been:

“As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal, and financial policies around the world have been aggressive and complementary. Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk.”

Bernanke on Predicting the Crisis 12 months ago:

“There was little to suggest that market participants saw the financial situation as about to take a sharp turn for the worse. For example, although indicators of default risk such as interest rate spreads and quotes on credit default swaps remained well above historical norms, most such measures had declined from earlier peaks, in some cases by substantial amounts. And in early September, when the target for the federal funds rate was 2 percent, investors appeared to see little chance that the federal funds rate would be below 1-3/4 percent six months later. That is, as of this time last year, market participants evidently believed it improbable that significant additional monetary policy stimulus would be needed in the United States.”

Bernanke on Macroprudential Regulation:

“The hallmark of a macroprudential approach is its emphasis on the interdependencies among firms and markets that have the potential to undermine the stability of the financial system, including the linkages that arise through short-term funding markets and other counterparty relationships, such as over-the-counter derivatives contracts. A comprehensive regulatory approach must examine those interdependencies as well as the financial conditions of individual firms in isolation.”

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