Bernanke's Statements: Blatant Lies or Wishful Thinking?

I have been staring in amusement at Bernanke's latest proclamation: Danger of downturn appears to have faded.

Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned, Federal Reserve Chairman Ben Bernanke said Monday.

The Fed's powerful doses of interest rate cuts, the government's $168 billion stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump and still solid demand from abroad for U.S. exports should help the economy over the remainder of this year, he said.

Wishful Thinking or Blatant Lie?

Bernanke’s statements are like standing in front of a tsunami proclaiming "The Worst Is Over" before the wave even hits the shore.

Professor Depew called Bernanke on his statements in point 1 of Tuesday's Five Things: Bernanke Says There's Never Been a Better Time to Sell Your Gold Jewelry for Cash.

Here's my take: Before we can say the worst is over or the danger has passed, the storm has to reach shore first. With that in mind I thought it might be interesting to look at a few headlines of things that are going to happen but have not happened yet.

Bank Failures

Bigger U.S. bank failures may be coming – FDIC

Future U.S. bank failures linked to the downturn in the real estate market may include "institutions of greater size" than in the recent past, Federal Deposit Insurance Corp Chairman Sheila Bair said on Thursday.

I talked about the expected wave of bank failures in Too Late To Stop Bank Failures.

Monoline Fallout

Citi, Merrill, UBS Face Monoline Losses, Whitney Says

We have yet to see the fallout from the downfall of the monolines (Ambac (ABK) and MBIA (MBI)) but we will.

$500 Billion Option ARM Crisis Coming Up

Option Arms - The Next Real Estate Crisis

By April, 2009, hundreds of thousands of option ARM mortgages will begin resetting, bringing on a fresh wave of foreclosures.



According to Credit Suisse (CS), monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Today, outstanding option ARM loans in the U.S. total about $500 billion, about 60% of which were sold to California homeowners, according to Credit Suisse. Option ARMs were especially popular in the state, where they were heavily marketed during the boom by such companies as Countrywide Financial (CFC), Washington Mutual (WM), and Wachovia (WB).

"Most of the public is thinking that the subprime thing is over, but this is another thing waiting," [said Chandrajit Bhattacharya, vice-president and mortgage strategist at Credit Suisse Securities].

By the way, that article is not contrary to what I presented in Greenspan Conundrum In Reverse. The problems with Pay Option ARMs are negative amortization, falling home prices, and payment shock. Those are far bigger problem right now than the risk of rising interest rates on regular ARMs that are about to reset.

Bernanke has minimized the fallout from ARM resets by slashing interest rates. Negative amortization, falling home prices, and payment shock problems are another matter altogether. I have expected an acceleration of Pay Option ARM problems for quite some time. The storm is about to hit.

Additional Problems

• A rising unemployment rate. I expect 6% by the end of the year and 7% or higher in 2009-2010.
• An imploding commercial real estate.
• Rising junk bond defaults.
• Rising numbers of foreclosures and bankruptcies.
• Rising credit card defaults.

Economic Picture Worsening

The economic picture is worsening across the board. And not just in the US but in the UK and Europe as well. A housing bust is now underway in the UK. Inquiring minds may wish to consider UK Housing Market Seizes Up.

In the meantime, Until Things That Have Not Happened Yet Do Happen, it defies credibility to suggest that danger has faded.

Impact of the Highly Improbable

The above is a discussion of "the known". There is also a huge risk factor from a Black Swan Event.

Last May, Taleb published The Black Swan: The Impact of the Highly Improbable. It said, among many other things, that most economists, and almost all bankers, are subhuman and very, very dangerous. They live in a fantasy world in which the future can be controlled by sophisticated mathematical models and elaborate risk-management systems. Bankers and economists scorned and raged at Taleb. He didn’t understand, they said. A few months later, the full global implications of the sub-prime-driven credit crunch became clear. The world banking system still teeters on the edge of meltdown. Taleb had been vindicated. “It was my greatest vindication. But to me that wasn’t a black swan; it was a white swan. I knew it would happen and I said so. It was a black swan to Ben Bernanke [the chairman of the Federal Reserve]. I wouldn’t use him to drive my car. These guys are dangerous. They’re not qualified in their own field.”

In December he lectured bankers at Société Générale, France’s second biggest bank. He told them they were sitting on a mountain of risks – a menagerie of black swans. They didn’t believe him. Six weeks later the rogue trader and black swan Jérôme Kerviel landed them with $7.2 billion of losses.

So not only is there the risk of the known, there is also risk of the unknown. Bernanke and Paulson have factored neither into their Pollyannaish statements. Talk from both of them is getting more ridiculous by the minute.

Comments

[icandoitdon:]

to me, bernake looks completely out of his element. he seems to say stupid things at just the wrong time. proclaiming that the worst is past was incredibly naieve. housing and financials are going to be sucking air for a long time and they are the linchpin of this economy....not exports.

but then again....the brain surgeons who run jp morgan and merrill lynch...or maybe it was morgan stanley...proclaimed the worst was over in financials too...just before they all took another major leg down.

finally, investors threw in the towel on lehman when it dawned on them that they didn't have a clue what their risk expose was. and who can forget their idiot CFO's comment that their rasing of $2b a couple of months ago was to "show the market they could do it"....not because they needed it. sure.

bank america buys countrywide when they could have picked up the assets for virtually nothing if they had the patience to wait.

wachovia raises their dividend last year in the face of a rapidly escalating liquidity crisis...only to cut it twice in the face of their mounting liquidity troubles.

the list goes on and on.

financial institutions are among the most poorly managed firms there are. when i was in grad school anyone who aspired to be a commercial banker was viewed as a class idiot. anyone who aspired to be an investment banker was viewed as a too-smart-for-their-ow... amoral thief. recent events have proven that bias to my satisfaction.

2008 Jun 13 02:46 AM

[Moneylender:]

Wait for the CDO's they run into trillions; more than 50 trillions.
No amout of pumping money will solve that crisis

2008 Jun 13 08:49 AM

[Ishortyou:]

in respect to the Ambac and MBIA, they need to keep and save their cash that they have already collected, deleverage from annoying debts and obligations, stop paying dividends to increase their book value and once the book value is adequate and sound reinstate their triple A ratings again to start writing down new government bonds insurance only in low risk areas of the market.

2008 Jun 13 09:06 AM

[CT Programmer:]

Remember the old commercials "When E.F. Hutton talks, people listen"? Greenspan was the successor to E.F. Hutton. For years, the market hinged on every innuendo and pause in between phrases of each and every public speech that Greenspan gave. They scrutinized and second-guesses everything he said. I think Bernanke is very aware of that, and the fact that everyone is throwing around doom and gloom --- if he joins the chorus (even if just by sighing in the wrong spot), it can move the market and usher in the bears. He's being a cheerleader. "It's not too bad". "The worst is over". He knows what's going on. He just knows that if he SAYS it, it will cause panic in the streets.

2008 Jun 13 11:00 AM

[Moneylender:]

In short you says
''reinstate their triple A ratings ''who are these cretins to rate, and it's only cretins who take heed of them.
I only know of one leader of a counntry who threw them out of conciderations including the WB and IMF and won the day

2008 Jun 13 11:28 AM

[unimpressed...:]

Don't any of you pundits realize the problem with our economy is not complex, requiring a nonsensical analysis, such as reading a crystal ball or studying tea leaves? Actually, the problem is quite simple to define: oil!

Until we get our energy dependence cured, the economy will continue to circle the bowl as the whirlpool of incompetence and stupidity drags the nation ever downward. The proposal being pushed by the Republicans in the Congress to drill in The ANWR, in the deep waters of the Gulf of Mexico (China and Cuba are, already doing it), and off the coast of California is the first thing to come out of the asylum known as Washington that has made any sense or promised a real solution. Add to this a proposal, being pushed by Rep. Chris Cannon of Utah, to accelerate the recovery of the trillion, that’s trillion, barrels of oil locked in the shale deposits of Utah, Wyoming, and Colorado would make us energy independent for several hundred years.

An immediate, but not a cure-all, solution would be to override the stupidity of the California politicians who refuse to allow Alaska oil to be refined in that state. It, therefore, is shipped to Japan! That’s OUR oil these clowns are exporting! And, in case you don’t know, these morons are Democrats.

All that is needed to achieve energy independence, is to kick out the obstructionist Democrats (surprise, surprise!) who control Congress, and elect sensible, knowledgeable, honest, and, hopefully, non-careerist Congress persons, in November. If the electorate awakens from its deep sleep that has allowed the Dems in Congress to muck up and weaken this nation, and gives them the boot, there is hope for our country. If not, all is lost. Believe it.

2008 Jun 13 12:10 PM

[icandoitdon:]

let me see if i understand.....

if not for our reliance on foreign oil, we never would have had a decline in housing prices, the rating agencies wouldn't have assigned AAA ratings to subprime debt, bear stearns wouldn't have gone under, the fed wouldn't have had to push real interest rates into the deepest negative territory they've been in a generation, the dollar woudn't have fallen, agricultural commodites wouldn't have doubled and the dow jones would be up 20% instead of down 13....life would have been peachy.

and it's all the dems fault!

thanks for explaining that. it all makes sense now.

2008 Jun 13 04:12 PM

[oldlures1:]

More chicken little rhetoric. Gre-e-e-a-t.
Moving on now...

2008 Jun 14 08:01 AM

[icandoitdon:]

keep going long and losing your money...you're only down 13% this year.

2008 Jun 14 11:39 AM

[Ishortyou:]

The problem is the overwhelming oversupply in the inventories of houses in the housing market, which by default caused a credit crises. Until this is not solved we are going to be in the same situation. I hope those builders just plain die till those inventories go away.

2008 Jun 15 01:09 PM

[OJO Zafado:]

As far as the " ragmatist" thinking...
` The US makes up about 5% of the worlds population and currently uses about 26% of current world oil production. Based on what has happened in Mexico and Russia where declines in production have occurred and what seems to be the inability of OPEC to SIGNIFICANTLY increase production there is less oil production for more demand. This is of course unsustainable long term. Marginally increasing domestic production will not off set the unsustainable nature of the US's oil consumption. The ANWAR is oil that we will eventually get but by then other oil wells will have peaked. The real problem with the US oil crisis is that the oil is a non replaceable resource with real intrinsic value. The US dollar on the other hand is no longer a paper fiat currency. Paper has been replaced by "electronic funds" transfer. A hundred billion here in TFAs and few hundred billion there in TRCAs, a few hundred billion to replace the money not raised by taxes to pay for Medicare and SS. Hundreds of billions shipped overseas to stock the shelves of Wal-Mart and supply the refineries of Exxon-Mobil. Hey might as well throw in a few trillion for "liberating" IRAQ. America has created a worldwide credit crisis and huge world inflation by flooding the world with their paper/electronic money. The solution is an obvious one and will not come about until thousands are dying of heat exhaustion and hypothermia here in the US. Nuclear power is coming back and big time. In the meantime coal fired power will bridge the gap. The only technical challenge then will be to the transportation segment of our economy. As long as the nation clings to the idea that more domestic production of oil is a solution when it is no long term solution at all then things will just get worse for our economy and the valuation of a US dollar. Ben the Dollar Slayer will eventually go away and resign in disgrace just as so many of his CEO buddies at the worlds major banks have fallen on their swords. It is hard to predict when the nation will be ready for more reality and less O'Reilly. Dummya and his band of henchman can indeed proclaim, "Mission Accomplished!!!". Globalization is now a reality . Dozens of US companies and thousands of US citizens now have great viable businesses and jobs while hundreds of businesses and hundreds of thousands of decent jobs have been eliminated. We have created the greatest concentration of wealth in the last 100 years. It is the same old story for the Republican Party. Be careful what you wish for...

2008 Jun 17 05:04 AM