On Friday, Ben Bernanke delivered a speech at Jackson Hole, in which he either said something that was very good news, or alternatively, said something very disappointing and you should get used to eating cat food and stealing WiFi. But which is it? Very good or very disappointing? And how screwed are we? So many tough questions! But do not worry — all questions will be answered because as always, your Wonkette is here to help! Herewith, a breakdown of Bernanke’s Jackson Hole presentation, and exactly how it relates to you and how screwed you are and probably will keep being for awhile. OH AND HAPPY LABOR DAY.
First: What is a “Jackson” Hole and Why Was Ben Bernanke in it?
Jackson Hole is a fancy mountain resort in Wyoming, near the Grand Tetons. It has also been the site of the Federal Bank of Kansas City’s annual economic symposium every year since 1978. Which means that every year since 1978, a bunch of academics, bankers, and policymakers have come together “to focus on a topic that is not necessarily of immediate concern, but instead looks into the future at emerging issues and trends.” And no, your Wonkette was not invited, but neither was Paul Krugman, so we are in good company.
So. What did Ben Bernanke Say? How Screwed Are We?
According to Paul Krugman, we are pretty screwed! Krugman’s takeaway was that Bernanke said the following:
1. Things are really, really bad.
2. The damage is cumulative; the longer this goes on, the worse the prospects for the future.
3. The Fed has the power to do a lot to help the economy.
4. While you can argue that there are costs to action, the case for major costs is quite weak, and in particular much weaker than the case for major benefits.
5. Therefore, what we at the Fed will do is, um, sit on our hands some more, and think very seriously about maybe, someday, doing something.
Is This Actually What Bernanke Said?
Kind of! He talked about the benefits of lowering the federal funds rate to zero, as well as the good that came from two rounds of quantitative easing. He also argued that the slow economic recovery was not because of “structural factors,” but rather because of the housing sector, the “tight budgets” faced by city and state governments, and “stresses in credit and financial markets.” And then he said that although high unemployment has serious and long term detrimental effects, the Federal reserve would “provide additional policy accommodation as needed.”
Paul Krugman — above — interpreted this as meaning that the Fed will think about doing something at some point in the future, and so did Brad DeLong; others, however, had a completey different takeaway. Like this L.A. Times reporter, who decided that this “made clear…that [Bernanke] was preparing additional monetary stimulus to spur the weak recovery, most likely at the central bank’s next policy meeting in mid-September. Also this WSJ reporter, who wrote that Bernanke had “laid the groundwork for more action.” The Economist came to a similar conclusion, claiming that Bernanke had paved the way for a third round of quantitative easing. After the speech, however, Federal Reserve Bank of San Francisco President John Williams called for $600 billion in additional bond purchases by the Fed to spur economic growth. So it’s possible that Bernanke thinks that the Fed is “ready” to do something sooner than later.
Wait, What is “Quantitative Easing”?
Does It Help?
What About the Federal Funds Rate?
This is another tool that the Fed has, but given that the Federal Funds Rate has been near or at zero for a few years now, it can’t really be lowered any more.
What is the Federal Funds Rate?
The Federal Funds Rate is the rate at which depository institutions (banks) lend balances to each other overnight, and is established by the Federal Open Market Committee, which meets once per month. This rate is pretty important — it impacts LIBOR (which is the rate that banks charge each other for one-, three-, and six-month loans as well as year-long loans), and also affects the prime rate, which is the rate that banks charge their customers. Unless their customers have bad or no credit, in which case, they get charged above the prime rate. Having a low federal funds rate, in theory anyway, encourages people to borrow money because the bank is getting the money at a low rate and can therefore (in theory) lend it to people at low rates. Currently, the fed funds rate is sitting at around 0 and has been for awhile. So the Fed doesn’t have much wriggle room if they want to keep lowering it.
Wait. If the Bank is Borrowing Money at Around 0%, Then Why is My Credit Card at 15% or 20%?
This is a great question! If someone could explain to us why the bank gets to borrow the money at around 0% and lend it to us at around 20%, we’d be pretty excited. Why not cut out the middle man and just borrow the money from the Fed ourselves, we ask? Oh and not to go too crazy, but perhaps while we’re at it, we could get someone to explain why our student loans — which we took out in 2008 and can never, ever refinance or discharge through bankruptcy, thus making them risk-free for the bank — is at 6.75% and is accruing interest, as we speak, while we earn our doctorate.
Why Are The Rates So Low?
The low rates are supposed to incentivize us to borrow more and spend more and therefore jump-start the economy. This hasn’t really been happening though, which you may have noticed. One theory is that households burdened by heavy debt loads aren’t responding to low interest rates by spending more because they need to reduce their debt first.
What About Unemployment? Bernanke Said Something About It Not Being Structural?
Indeed he did. You’ll remember that Ben Bernanke rejected the idea that the current high level of unemployment is structural in nature, saying Friday, “I see little evidence of substantial structural change in recent years.” This suggests that Bernanke thinks businesses aren’t hiring because of weak demand, rather than because workers’ skills do not match the skills that employers need. Not everyone agrees with this assessment, however. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said workers in his region of the U.S. lacked the skills that employers were looking for — a problem economists describe as structural.
Your Wonkette, however, can’t help but notice that corporate profits are at an all time high while wages are at an all time low . Your Wonkette has also noticed that careers seem to be only for Olds and the wealthy, given that more and more companies are hiring workers on a temporary or freelance basis rather than retaining them full time. Your Wonkette also does not buy the argument that Americans lack science or math skills, given that U.S. drug firms have slashed 300,000 jobs since 2000, and that just 38 percent of new PhD chemists were employed in 2011. It seems, therefore, that we are moving into a sort of post-job economy.
So What Will Happen?
The Fed can’t really lower interest rates any more. Also, low interest rates might not be doing much good anyway, given that American households are so burdened with debt. So it may or may not be set for a third round of quantitative easing to the tune of $600 billion. However, some — like leading monetary policy theorist Michael Woodford — think this isn’t the best course of action.
In a paper delivered at Jackson Hole, Woodford concluded that:
“Central bankers confronting the problem of the interest-rate lower bound have tended to be especially attracted to proposals that offer the prospect of additional monetary stimulus while (i) not requiring the central bank to commit itself with regard to future policy decisions, and (ii) purporting to alter general financial conditions in a way that should affect all parts of the economy relatively uniformly, so that the central bank can avoid involving itself in decisions about the allocation of credit. Unfortunately, the belief that methods exist that can be effective while satisfying these two desiderata seems to depend to a great extent on wishful thinking.”
And Paul Krugman pretty much agrees, saying that the bottom line is ““Ben, ur doing it wrong.”
What Does That Mean?
What we’ve been saying for awhile: for the time being anyway, the post-job economy will be your new reality for a bit longer, so get used to it.