An excerpt from today's Marta on the Markets' daily Morning Minute:
The headlines regarding his speech last night generally refer to the statement that inflation cannot be controlled if loose policy is kept in place by a Fed "paralyzed" by mere "patches of lingering weakness". Unemployment, much of it structural, going the wrong way is neither "lingering" nor just a "patch". Nor are empty cities (due to structural shifts in our economy) and suburbs (due to massive overbuilding). Nor is capacity utilization still far below any prior cyclical bottom since the late '60s just a patch.
However, the most troubling line in his speech was, "the boom/bust cycle in housing was the central driving force in this recession". This statement smacks of a narrow, US economic-centric view of the world. The driving force was rising globalization, exploding technological gains, and a failure to comprehend the results of the massive differences between the world's key trading partners: US and China. And as these driving forces bore down on the financial system and economy, policymakers responsible for regulating the financial system, relying on antiquated models and paradigms couldn't "see" the problem. Add some action scenes and the situation would have looked like part of the "Tora, Tora, Tora" movie. Housing was just the symptom.
In 2007, I (and I was no visionary, but merely a spokesperson for the excellent fixed income personnel at RBC), specifically and in no uncertain terms explained to the OCC that what was happening was very dire and why. The ranking official responded that he could not see how my observations threatened the entire economy. I was thunderstruck at the time. But I am even more thunderstruck that with the banking and international financial system still in ruins and the economy showing signs of life only because of the artificial life support being provided by central banks, that there is still such a benign view of the situation.
Policymakers had better not get too secure that they have won the battle, anymore than the people of New Orleans should have rested easy after Katrina passed. There is much hard work to do - and the levies, in this case the state and national coffers, are breaking.