“On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters. Significant restraints on the pace of the recovery remain, including weakness in both residential and nonresidential construction and the poor fiscal condition of many state and local governments.”
Carefully crafted, his statement forecasting economic activity achieved its intention: give the impression things are looking up, despite “weaknesses.” Make no mistake, Mr. Bernanke is a Keynesian economist. Never judge a person by his/her words, but rather by their actions. And Mr. Bernanke’s actions reveal a deep trust and abiding faith in an economic interventionist policy, a modern legacy of Lord Keyes.
The aforementioned “weaknesses” are quite obvious. This deep recession has cut significantly a vast source of revenue for governments: taxes. The fact of the matter is that long-term unemployment, i.e. those people who have been out of work more than 27 weeks, currently stands at 6.5 million. This number constitutes approximately 44% of those unemployed. This can only mean that people that have been let go from their jobs are not finding new ones. Furthermore, this gives evidence that jobs that were created during the last boom period are not returning. It is no wonder why the Obama administration extended for several months unemployment benefits.
The housing market, it goes without saying, is in shambles. Over the last year, the government, through the Federal Reserve Board, committed to purchased $1.2 trillion of Agency mortgage back securities with the objective of keeping mortgage interest rate low. Rates began a downward trajectory. However, these purchases ended in March 2010. As you can see here, 30-year mortgage rates are going up, which will undoubtedly put pressure on housing prices.
Overall, the trillions of dollars of fiscal and monetary stimulus have had a relatively subdued effect, particularly if one considers that present levels of debt are not only nonproductive but also a restrain on economic growth. See here. We are in a period of transition, which is being sustained by government intervention of the economy. When the pace of such support slows, invariably its effects will subside over time, ultimately leading to an economic bust. Support has slowed. It is only a matter of time before this sham economic growth extolled by Mr. Bernanke reverses. Court economists will be the last ones who will see the oncoming crisis.