60 Minutes interviews Fed Chairman Ben Bernanke

Last week, 60 Minutes correspondent Scott Pelley went on a ride-along with the FDIC when taking over a bank outside of Chicago. This week, he interviews Federal Reserve Chairman Ben Bernanke and asks the question, "When does this end?" First, from CBSNews.com:

"Mr. Chairman, I'm gonna start with a question that everyone wants me to ask: when does this end?" 60 Minutes correspondent Scott Pelley asked Bernanke.

"It depends a lot on the financial system," he replied. "The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not gonna see recovery. But we do have a plan. We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year. We'll see recovery beginning next year. And it will pick up steam over time."

Asked if he thinks the recession is going to end this year, Bernanke said, "In the sense that this decline will begin to moderate and we'll begin to see leveling off. We won't be back to full employment. But we will see, I hope, the end of these declines that have been so strong in a last couple of quarters."

"But you wouldn't say at this point that we're out of the woods?" Pelley asked.

"No," Bernanke replied. "I think the key issue is the banking system and the financial system."

"Unemployment, as we sit here, is about 8.1 percent. I wonder, do you expect double digit unemployment?" Pelley asked.

"Well, it's hard to forecast exactly where we're going. Unemployment is rising. Job losses are still very severe. And no doubt, the unemployment rate's gonna go higher than it is. But I think, again, that if we do succeed in stabilizing the financial system, that we'll begin to see a slower pace of decline, and eventually, a stabilization that will set the basis for a recovery," Bernanke said.

"You seem to be saying that we're not heading into a new American Depression?" Pelley asked.

"I think we've averted that risk. I think we've gotten past that and now the problem is to get the thing working properly again," the chairman said.

The video is in two parts. First, part one:



Next, part two:

What makes a depression a depression?

When is a depression a depression? When you stay in bed and cry into your pillow? When you throw beer bottles at "American Idol Rewind?" When you over-react because someone bumped into you? We've been hearing that word a lot lately in the news, and the Calculated Risk blog provides some interesting comparisons, including the GDP losses of the recessions of the 20th century as well as the Great Depression:

Although there is no formal definition, most economists agree it is a prolonged slump with a 10% or more decline in real GDP...

Some people argue the duration of the economic slump defines a depression - and the current recession is already 15 months old. That is longer than the recessions of '90/'91 and '01. The '73-'75 recession lasted 16 months peak to trough, and the early '80s recession (a double dip) was classified as a 6 month recession followed by a 16 month recession (22 months total). Those earlier periods weren't "depressions", so if duration is the key measure, the current recession still has a ways to go...

I still think a depression is very unlikely. More likely the economy will bottom later this year or at least the rate of economic decline will slow sharply. I also still believe that the eventual recovery will be very sluggish, and it will take some time to return to normal growth...

"Dr. Doom" Roubini says 'break every mortgage contract.'

According to economist Nouriel "Dr. Doom" Roubini, although the U.S. has narrowly averted a catastrophic economic meltdown, the current recession will last up to 3 years (ending in late 2010) and push the Dow down to 5,000. From an interview at CNBC:

The man who predicted the current financial crisis said the US recession could drag on for years without drastic action.

Among his solutions: fix the housing market by breaking "every mortgage contract."

"We are in the 15th month of a recession," said Nouriel Roubini, a professor at New York University's Stern School of Business, told CNBC in a live interview. "Growth is going to be close to zero and unemployment rate well above 10 percent into next year."

Echoing a speech he made earlier in the day, Roubini said he sees "no hope for the recession ending in 2009 and will more than likely last into 2010."

Roubini, who is also known as "Dr. Doom," told CNBC that the risk of a total meltdown has been reversed for now but that the economy is going through "a death by a thousand cuts." He also said that "most of the U.S. financial institutions are entirely insolvent."

"The market friendly view for the banks is nationalization," said Roubini. "Temporarily take over the banks, clean them up and get them working again...

He said that while U.S. GDP next year could be zero, global GDP could dip into negative territory.

"We could end up ... with a 36-month recession, that could be "L-shaped stagnation, or near depression," Roubini said. He puts the chance of a severe U-shaped recession at 66.7 percent, and a more severe L-shaped recession at 33.3 percent...

So what can the government do? The easy part is lowering interest rates and buying toxic assets. The hard part, he says, will be tackling housing. Roubini says that the housing market, like a company restructuring in bankruptcy, needs to have "face value reduction of the debt." Rather than go through mortgages one by one, he says reduction has to be "across the board...break every mortgage contract."

14.8% unemployment and under-employment

According to the Economix blog at the New York Times, if you add up the levels of unemployed PLUS those under-employed (i.e., working the night shift at an Amazon warehouse but with a previous career in PR) as well as having given up looking at all, the total figure is closer to 15%. So exactly how bad is this downturn?

Since the start of 2008, the economy has lost jobs at a steeper rate than at any other point in 50 years. That hadn’t been true until today’s report. But the 651,000 job losses in February — together with 161,000 additional job losses in previous months, a result of Labor Department revisions announced today — means that the decline is worse than it was at any point during the deep recessions of the mid-1970s and of the early 1980s...

The government’s broadest measure of unemployment and underemployment was 14.8 percent in February. That includes some of the people who have stopped looking for work because they don’t believe they can find jobs. It also includes part-time workers who want to be working full time...
So it’s still too early to call this the worst recession since the Great Depression. But it’s bad, and it’s still getting worse at a rapid rate.

Do continuing job losses mean a greater economic shift?

You've probably heard terms before like "creative destruction," in which new technologies and ways of doing business can transform entire industries. But what happens if the entire economy is facing a generational shift? From a story in the New York Times:

Another 651,000 jobs disappeared from the American economy in February, the government reported Friday, as the unemployment rate soared to 8.1 percent — its highest level since 1983.

The latest grim scorecard of contraction in the American workplace largely destroyed what hopes remained for an economic recovery in the first half of this year, and added to a growing sense that 2009 is probably a lost cause...

The acceleration has convinced some economists that, far from an ordinary downturn after which jobs will return, the contraction under way reflects a fundamental restructuring of the American economy. In crucial industries — particularly manufacturing, financial services and retail — many companies have opted to abandon whole areas of business...

For American policy makers, such a reality poses fundamental challenges to the traditional response to hard times. For decades, the government has reacted to economic downturns by handing out temporary unemployment insurance checks, relying upon the resumption of economic growth to deliver needed jobs.

This time, argues Mr. Silvia, the government needs to put a much greater emphasis on retraining workers for careers in other industries.In the auto industry, for example annual American car sales have dropped from some 17 million a year a few years ago to 9 million now. Even if sales increase to 10 or 12 million, that still leaves a lot of unneeded factories...

Much the same can be said for financial services, which gave up another 44,000 jobs in February. During the housing boom, banks hired tens of thousands of well-compensated traders, analysts and marketers to sell mortgage-backed securities and other exotic flavors of investments. That industry is unlikely to return to anything close to its former shape...

Click here for full story.

How the economic crash will re-shape America

Dr. Richard Florida, author of such books as "The Rise of the Creative Class" in 2002 and "Who's Your City?" in 2008, has written a very interesting article in the Atlantic Monthly positing that the current economic crash is different from most others which came before it because it has the capacity to re-shape the geographic demographics and land use patterns of the U.S. Like the Great Depression of the 1930s, he thinks it will usher in a different way of living, spending and investing.

Florida is definitely an interesting guy. I interviewed him by phone when writing a review of "Who's Your City?" for the L.A. Times, and besides being the head of the Martin Prosperity Institute at the Rotman School of Management, at the University of Toronto, and writing a regular column for the Toronto Globe & Mail, he also heads a private consulting firm, the Creative Class Group. From the article (which is quite lengthy, so I suggest definitely clicking on the link here to read it in its entirety):

No place in the United States is likely to escape a long and deep recession. Nonetheless, as the crisis continues to spread outward from New York, through industrial centers like Detroit, and into the Sun Belt, it will undoubtedly settle much more heavily on some places than on others. Some cities and regions will eventually spring back stronger than before. Others may never come back at all. As the crisis deepens, it will permanently and profoundly alter the country’s economic landscape. I believe it marks the end of a chapter in American economic history, and indeed, the end of a whole way of life...

The crisis has exposed deep structural problems, not just in the U.S. but worldwide. Europe’s model of banking has proved no more resilient than America’s, and China has shown that it remains every bit the codependent partner of the United States. The Dow, down more than a third last year, was actually among the world’s better-performing stock-market indices. Foreign capital has flooded into the U.S., which apparently remains a safe haven, at least for now, in uncertain times...

...the recession, particularly if it turns out to be as long and deep as many now fear, will accelerate the rise and fall of specific places within the U.S.—and reverse the fortunes of other cities and regions.

By what they destroy, what they leave standing, what responses they catalyze, and what space they clear for new growth, most big economic shocks ultimately leave the economic landscape transformed. Some of these transformations occur faster and more violently than others. The period after the Great Depression saw the slow but inexorable rise of the suburbs. The economic malaise of the 1970s, on the other hand, found its embodiment in the vertiginous fall of older industrial cities of the Rust Belt, followed by an explosion of growth in the Sun Belt...

...The housing bubble was the ultimate expression, and perhaps the last gasp, of an economic system some 80 years in the making, and now well past its “sell-by” date. The bubble encouraged massive, unsustainable growth in places where land was cheap and the real-estate economy dominant. It encouraged low-density sprawl, which is ill-fitted to a creative, postindustrial economy. And not least, it created a workforce too often stuck in place, anchored by houses that cannot be profitably sold, at a time when flexibility and mobility are of great importance...

The foreclosure crisis creates a real opportunity here. Instead of resisting foreclosures, the government should seek to facilitate them in ways that can minimize pain and disruption. Banks that take back homes, for instance, could be required to offer to rent each home to the previous homeowner, at market rates—which are typically lower than mortgage payments—for some number of years. (At the end of that period, the former homeowner could be given the option to repurchase the home at the prevailing market price.) A bigger, healthier rental market, with more choices, would make renting a more attractive option for many people; it would also make the economy as a whole more flexible and responsive.

Next, we need to encourage growth in the regions and cities that are best positioned to compete in the coming decades: the great mega-regions that already power the economy, and the smaller, talent-attracting innovation centers inside them—places like Silicon Valley, Boulder, Austin, and the North Carolina Research Triangle...

What will this geography look like? It will likely be sparser in the Midwest and also, ultimately, in those parts of the Southeast that are dependent on manufacturing. Its suburbs will be thinner and its houses, perhaps, smaller. Some of its southwestern cities will grow less quickly. Its great mega-regions will rise farther upward and extend farther outward. It will feature a lower rate of homeownership, and a more mobile population of renters. In short, it will be a more concentrated geography, one that allows more people to mix more freely and interact more efficiently in a discrete number of dense, innovative mega-regions and creative cities...

To be certain, these themes echo what Florida has already discussed in his previous books. Whether or not these theories will come to pass, of course, remains to be seen.

Diagnosing (economic) depression

With all the rhetoric (and blog posts) about a potential economic depression, The Economist offers a means to diagnose the differences between a recession, a depression and a Great Depression. From the story:

THE word “depression” is popping up more often than at any time in the past 60 years, but what exactly does it mean? The popular rule of thumb for a recession is two consecutive quarters of falling GDP. America’s National Bureau of Economic Research has officially declared a recession based on a more rigorous analysis of a range of economic indicators. But there is no widely accepted definition of depression. So how severe does this current slump have to get before it warrants the “D” word?

A search on the internet suggests two principal criteria for distinguishing a depression from a recession: a decline in real GDP that exceeds 10%, or one that lasts more than three years. America’s Great Depression qualifies on both counts, with GDP falling by around 30% between 1929 and 1933. Output also fell by 13% during 1937 and 1938. The Great Depression was America’s deepest economic slump (excluding those related to wars), but at 43 months it was not the longest: that dubious honour goes to the one in 1873-79, which lasted 65 months...

Before the 1930s all economic downturns were commonly called depressions. The term “recession” was coined later to avoid stirring up nasty memories. Even before the Great Depression, downturns were typically much deeper and longer than they are today (see right-hand chart). One reason why recessions have become milder is higher government spending. In recessions governments, unlike firms, do not slash spending and jobs, so they help to stabilise the economy; and income taxes automatically fall and unemployment benefits rise, helping to support incomes. Another reason is that in the late 19th and early 20th centuries, when countries were on the gold standard, the money supply usually shrank during recessions, exacerbating the downturn. Waves of bank failures also often made things worse.

But a recent analysis by Saul Eslake, chief economist at ANZ bank, concludes that the difference between a recession and a depression is more than simply one of size or duration. The cause of the downturn also matters. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level. In the Great Depression average prices in America fell by one-quarter, and nominal GDP ended up shrinking by almost half. America’s worst recessions before the second world war were all associated with financial panics and falling prices: in both 1893-94 and 1907-08 real GDP declined by almost 10%; in 1919-21, it fell by 13%...

Where does that leave us today? America’s GDP may have fallen by an annualised 6% in the fourth quarter of 2008, but most economists dismiss the likelihood of a 1930s-style depression or a repeat of Japan in the 1990s, because policymakers are unlikely to repeat the mistakes of the past. In the Great Depression, the Fed let hundreds of banks fail and the money supply shrink by one-third, while the government tried to balance its budget by cutting spending and raising taxes. America’s monetary and fiscal easing this time has been more aggressive than Japan’s in the 1990s.

However, these reassurances come from many of the same economists who said that a nationwide fall in American house prices was impossible and that financial innovation had made the financial system more resilient. Hopefully, they will be right this time. But this crisis was caused by the largest asset-price and credit bubble in history—even bigger than that in Japan in the late 1980s or America in the late 1920s. Policymakers will not make the same mistakes as in the 1930s, but they may make new ones.

Click here for full story.

So how does this recession compare to others?

"The Economist" has an interesting article entitled "A thoroughly modern recession," and argues that although the current recession is sure to be the longest since WWII, since high interest rates weren't the culprit it has more in common with the downturns of the early 1990s and 2001 than the one largely enabled by the Fed hiking interest rates in the early 1980s. From the article:

Though it may end up as one of the longest recessions, if not the longest, of the post-war era, the current episode still seems to have more in common with the mild downturns of 1990-91 and 2001 than the more wrenching affairs that came before.

As Robert Hall, an economist at Stanford University, notes, earlier recessions, like that of the early 1980s, were caused by the Fed raising interest rates sharply to squelch emerging inflation and holding them high even once the recession began. In the current and past two recessions, interest rates never got very high and the Fed actually began to lower them before the contraction began. In a paper written a year ago*, Mr Hall described such apparently “causeless” recessions as perplexing...

The paradoxical truth may be that the less volatile business cycle (until recently) encouraged investors to take bigger risks with borrowed money, driving asset prices too high and ending in damaging busts. Some would still blame the Fed, for not deflating asset bubbles with higher interest rates.

In a recent speech, Donald Kohn, the vice-chairman of the Fed, rejected that charge but pleaded guilty to a lesser one: by better controlling inflation, central banks helped moderate the business cycle, which bred investor complacency. They thus “may have accidentally contributed to the current crisis.” The Fed may no longer be the prime suspect for causing recessions; but it is still an accessory to the crime.

Click here for full story.