Federal Reserve Chairman Ben Bernanke told Congress Tuesday that the economy should pull out of a recession and start growing again later this year. But in testimony to Congress' Joint Economic Committee, Bernanke warned that even after a recovery gets under way, economic activity is likely to be subpar. That means businesses will stay cautious about hiring, driving up the nation's unemployment rate and causing "further sizable job losses" in the coming months, he said. The recession, which started in December 2007, already has snatched a net total of 5.1 million jobs. The unemployment rate "could remain high for a time, even after economic growth resumes," Bernanke said. – AP
Dominant Social Theme: Let the good times roll.
Free-Market Analysis: American Federal Reserve chairman Ben Bernanke is optimistic about the economy. But we note that the AP excerpt above offers up a bifurcated economic prognostication, and this is exactly the one that the Bell itself has been providing to its increasingly massive audience (we are humbled by our increased popularity!).
In any event, we wrote the following just yesterday as a matter of fact (though it was a restatement of several earlier analyses):
From our point of view the economy, if markets do rise, is not rebounding so much as diverging. The paper economy (call it the investment economy) can float skyward but the real economy, the one that creates things still has a good deal of recovering to do. You know, people may be informed the stock market is climbing again — and all is well. The next day, they may lose their jobs.
Now, from our point of view, Bernanke has just restated the above excerpt. In our reading, he makes the point that economy is going to be subpar even after the recovery is underway.
Business will stay cautious about hiring, driving up the nation's unemployment rate and causing further sizable job losses … The unemployment rate could remain high for a time even after economic growth resumes.
Most people reading this statement will simply assume Bernanke is being cautious. But Daily Bell readers are a "cut above." They will read this statement as we do, and understand that it is not an excess of caution that drives Bernanke's analysis but a profound understanding of the mechanism of the Fed's "bailout" of the larger economy. Since it a diagnosis that is far afield of what appears in mainstream media, we will restate it on behalf of our readers. In fact, since we are confident we know some of what is in Bernanke's head, we will put it into Bernanke's own words, as follows:
(What Bernanke is thinking — our speculation — right before he testifies to Congress) …
Well, here I am in front of Congress again, and I better be careful what I say. Ol' Ron Paul already has 100 co-sponsors of his bill to audit the Fed, and I don't want to give anybody any more ammunition. The economy may be rebounding, but there sure is a lot of anger out there. That's why all my appearances have been so carefully scripted. Don't want any shoes thrown in my direction. Anyway, let's see what I'm supposed to tell these guys. They'll believe anything I say, or pretend to. Who wants to fight with the Fed?
Could I tell them the truth? Well, maybe a little. In fact, the truth is that over this past year we've done what the Fed always does in a time of trouble, we handed massive amounts of paper money to our constituency – the commercial banks! Sure it would have been more effective simply to offer people a massive tax cut, but our whole purpose is to control the economy not simply to make it grow. The Fed is actually a banking venture, a business if you will, but most people don't understand that. They think we're a government entity and a public service, but we're not. We're a private entity and we don't even report to Congress, though we have to fill them in from time to time.
So, yes, it's important to maintain the fiction that we care a great deal about the economy and economic performance, and I suppose we do, though only so long as we maintain the control we need, and that includes the legal franchise to print money. We have to paint the brightest picture possible without sounding foolish.
That son-of-a-gun von Mises had it right when he wrote about "human action" and how it's people themselves that drive an economy, not nations, industries or banks. But we've got ‘em a bit brainwashed, I guess, and hopefully they'll stay that way. When the economy goes south, we tell everybody that we have to save the banking system, as if without banks industry would die. Of course it wouldn't. Banks are nothing but money warehouses. It's PEOPLE who make the difference. But we don't want to hand out money to people – no control that way. We need a chain of command. We control the banks, and regulate ‘em, so we're comfortable with a bank bailout. You'll never hear about a "people bailout" – not from the Fed anyway.
But funding banks has a problem. Banks, in our modern configuration are not really independent entities. They're basically our subsidiaries and will for the most part do as they're told. But when it comes to lending, that's a hard deal. Sure, we can force ‘em to lend, but we're not really that keen on it. Better to complain loudly while continuing to force them to shore up their bottom lines. See, we want to show people that it's bank solvency that will drive the economy – even if it's not true. Better that way. If everyone associates prosperity with bank solvency, why that's very good for us!
But the problem is that giving money to banks DOESN'T drive solvency. In a paper-money economy, banks don't really create anything, or not by themselves anyway. They just lend money, so if the money isn't being lent, the economy isn't growing – or not THIS economy anyway. One thing banks do, however, is "invest." That excess liquidity has to drive something, and if banks aren't lending it, the extra money probably finds its way into securities, or at least some of it does. That's why the result of bank lending can help move the stock market up. Banks and their subsidiaries begin to trade again – institutional trading, first of all, and principal trading …
For this reason, the stock market can move up while the larger economy founders. The money we're printing is increasing the solvency of banks while re-igniting stock trading. Now all we have to do is point out that these are the leading precursors of a general recovery. Of course they may be, or maybe not. They are two entirely separate issues, but we don't have to explain that to anyone. In fact, the real worry is that we run a serious risk that the banks and the markets will move in one direction, while the real economy moves in another direction.
Fortunately, the public thinks we're being responsible by funding the money center banks. They don't see any other alternatives. They don't understand that the money we've given to banks can build up their bottom line and even flow through to stocks, causing the market to rise – a procedure that will initially help a thin wedge of large corporations. But it won't necessarily trickle down to the rest of the real economy, which still needs to shake itself out and adjust from the latest deflating bubble. For that reason, I still expect further job losses, further deflation, further economic realignment and losses in insurance, commercial real estate and derivatives.
But I won't get into all that. I'll simply state that banks and the stock market are showing signs of recovery but that the larger economy is going to be a lagging indicator. That makes it sound like I'm being cautious, which is a very good way for a central banker to sound. See, I'm not misleading folks, I'm simply leaving out the real explanation. But heck, that's what they pay me for, isn't it? Central bankers are supposed to be hard to understand. Greenspan was, bless him …
Of course, we don't REALLY know this is what Bernanke thinks. (Heck, this is a man who thinks dropping money from helicopters is a monetary panacea.) But it is what he SAID to Congress – that the real economy (with its continued unemployment) is expected to lag the economic "recovery." In fact, in our humble opinion, the only economic recovery that will take place will be driven by stock market gains that will in turn fund the profits of America's largest corporate entities.
This is a fragile sort of recovery indeed, and it the basic reason why Bernanke sounds schizophrenic. He understands that a Fed-led recovery inevitably starts with the banking industry, translates itself gradually into equity growth and from there kick-starts the expansion of America's largest corporate entities, the ones that benefit most from a market upturn.
Again, all of this takes time and it's a most awkward way of trying to generate a recovery. You could do the same thing a lot more quickly and effectively by putting money into the hands of individuals, especially entrepreneurs and entrepreneurial groups. And you can do this through fiscal policy. Massive tax cuts would get the job done a lot more quickly than the Fed-to-banks-to-markets-to-corporations-to-employees route.
There's a lot that can go wrong with this sort of Fed-lead stimulation, and that's why the Daily Bell, among other hard money publications, is not so certain that an economic recovery is as near and as final as Bernanke and others are predicting. What is more likely is that the stock market goes up, some large corporations begin to turn a profit and the mainstream media immediately launches a number of reports on the "end of the downturn." This is a little bit like starting a war and then leaving in the middle while declaring victory. Gold may still be rising, by the way – but Bernanke et. al. will certainly label that an aberration.