Bernanke Has Reached a Point of Recognition, Paulson Hasn't

by: Michael Shedlock

Paulson says "Time is of the Essence" in any Stimulus:.

U.S. Treasury Secretary Henry Paulson said the U.S. economy slowed "rather materially" at the end of 2007, and any stimulus package should be put into effect quickly.

"We are looking at things that could be done quickly," Paulson said. "Time is of the essence. There are signs the economy is slowing down fairly rapidly," he said. "If something were to be done here, I think the focus would be on something that's temporary and that could get done and make a difference soon."

Paulson, acknowledging that Bush can't convince the Democratic-led Congress to make his 2001 and 2003 tax cuts permanent, said that it would be easier to get agreement on temporary measures designed to speed help to the economy.

"If there is a stimulus, I think the purpose would be to help the economy this year," the former chief executive officer of Goldman Sachs Group Inc. said.

Paulson said he expects the U.S. will avoid a recession, helped in part by record exports. Yet he acknowledged the U.S. economy is heading for tougher times.

Countrywide Financial Corp., the nation's biggest mortgage lender, agreed today to be taken over Bank of America Corp. after speculation surged this week the lender would be forced to file for bankruptcy.

Paulson declined to comment specifically on the merger. He did say the Treasury was encouraging banks and other financial institutions to strengthen their balance sheets by raising more money from investors so they won't have to cut back on lending.
Teetering On The Point Of Recognition

Paulson knows that things have weakened considerably. That much is clear. However, he somehow thinks we can avoid a recession that we are already in. In addition, his export theory does not fly. Exports are not going to save the U.S. because the world (the U.K. and EU in particular) is not going to decouple from a U.S. recession.


If grain prices keep rising, oil prices collapse, and consumers stop buying junk from China, then yes, trade imbalances will improve. But it will take a collapsing economic picture to sink oil prices. For the record, I think oil prices have reached a near term peak, but prices could easily double if Bush was to do something stupid like invade Iran.


Paulson Miles From Reality On Solutions

The thing that bothers me most about Paulson is his desire to "strengthen [bank] balance sheets so they won't have to cut back on lending."

A "stimulus" package that encourages more risky lending is exactly what we do not need. It was irresponsible lending that created this mess we are in. And it was poor economic policy by the Fed that encouraged irresponsible, even reckless, lending.


Paulson is either lacking candor or he simply does not understand the gravity of the situation. Worse yet, it is clear he does not have a clue about the cause or the cure of the mess we are in. Paulson strikes out.

Bernanke Reaches Point of Recognition

Kevin Depew wrote a stunningly good article on Friday about Bernanke's recent speech on Financial Markets, the Economic Outlook, and Monetary Policy.

Kevin's article is called Bernanke Hits One Out of the Park. Let's tune in for the opening premise then points 6 and 7 of his analysis. I encourage everyone to read it all.
And now for a completely unexpected point of view. Yesterday's speech by Federal Reserve Chairman Ben Bernanke may have been one of the greatest speeches ever delivered by a Federal Reserve Chairman.

Let me be clear, I am no fan of the Federal Reserve. I believe the very institution itself is a mistake. But reality, intrusive as it is, has put us here at a time where, like it or not, the Federal Reserve's actions influence financial markets and thus help shape the psychology and belief systems of the participants in those markets.

Bernanke's speech yesterday was a rigorous departure from anything former Federal Reserve Chairman Alan Greenspan ever crafted, and that is probably why it was so very good. What was absent was the Greenspan-esque obfuscation and sophistry - the public speaking technique the former Fed Chairman perfected so well and... for which he will one day be vilified, rather than praised as "The Maestro."

Instead, there was an honest assessment of the problems facing the economy, and a clear declaration of the Bernanke-led Federal Reserve's macroeconomic goals and objectives, placed squarely within the context of what this Fed believes is its dual mandate of promoting maximum sustainable employment and price stability.

We can debate that dual mandate for weeks and months, even years, but we will be doing so even as it functions as the guidepost for this Federal Reserve's macroeconomic policy. So until we are ready as a country to actually do something about changing it, let's leave it to economic academia and look at seven sentences from Bernanke's speech that have the potential to make it a classic.

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6. Without Credit Expansion, Growth Must Slow

"More-expensive and less-available credit seems likely to impose a measure of financial restraint on economic growth."

I'm not sure a Federal Reserve Chairman has ever put forth this premise with such clarity. This is what the Federal Reserve does, like it or not. It makes credit available in what it hopes are manageable doses. In academia much debate centers on whether this is possible. It's never before been possible in the history of the world, but because our experiment is playing out in real time, we at least feel like we don't know for sure how it's going to end; at times, an inconvenient illusion.

7. The Point of Recognition

"[A]ny tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank’s policy flexibility to counter shortfalls in growth in the future."

A "point of recognition" moment is what the Fed fears most. At that moment - the recognition that credit expansion has met an irresistible wall of credit revulsion - the Federal Reserve will have exhausted its arsenal of "traditional" policy tools.

In a sense, the speech is an interesting gambit by this Federal Reserve Chairman. Instead of obfuscation and sophistry, he's instead chosen to outline very clearly what is happening and what the policy responses will be. Perhaps, arguably, he had no choice. But the departure from the days of Greenspan is stark.

On a deeper level, the admission - and that's what it is, an admission - that there are things out there that could "reduce the central bank’s policy flexibility" might be the one concept even the most intractable Fed abolitionists can thank Bernanke for introducing. Looking ahead to the other side of the "point of recognition," it actually lays the foundation for re-thinking the Fed's dual mandate. When that time comes, let's hope we have the courage to choose correctly.
Bernanke, unlike Paulson has reached a point of recognition.

The question now is: Will Bernanke courageously re-think the Fed's mandate and appropriate actions thereof, or will he foolishly follow the footsteps of Japan, by pursuing the ideas he outlined in one of the most ridiculous Fed speeches ever: Deflation: Making Sure "It" Doesn't Happen Here?