Friday, February 15, 2008

Bernanke on the "sluggish" economy

From today's C-J...

Using words like "sluggish" and "deteriorated," Federal Reserve Chairman Ben Bernanke gave a starkly pessimistic assessment of the nation's economy yesterday and signaled that the Fed will cut interest rates further if needed to combat the effects of a prolonged housing slump and a severe credit crisis....

That's monetary policy-- where the Fed tries to moderate the business cycle by pulling the levers available to us. This is in contrast to fiscal policy-- where Congress and the President try to moderate the business cycle through changes in govt spending and taxes.

Bernanke told the Senate Banking Committee that the serious housing slump and a credit crisis triggered by rising defaults in subprime mortgages had greatly strained the economy.

"The outlook for the economy has worsened in recent months, and the downside risks to growth have increased," Bernanke said.

Bernanke noted that hiring has slowed, with 17,000 jobs lost in January, the first such setback in more than four years. He said the weaker labor market along with recent declines in stock and home prices were likely to be a drag on consumer confidence....

Bernanke said he did not predict a recession but a period of sluggish growth "followed by a somewhat stronger pace of growth starting later this year"...

Notice the difference between a recession (negative growth) and sluggish (but positive) growth.

Bernanke said the Fed would monitor the economy closely and would "act in a timely manner as needed to support growth and provide adequate insurance against downside risks."...

Key word: "timely". Congress and the President are not nearly as capable of doing countercyclical policy in a timely manner.

[The] stimulus package, which Congress approved last week, is expected to give the economy a sizable jolt in the second half of the year. But many economists believe the money and business incentives will come too late to keep the economy from recording two consecutive quarters of negative economic output, the classic definition of a recession.

Yep. Aside from its many other problems, even if it would work, it almost certainly would come too late...

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