Bernanke: Recession Not Imminent

Speaking at the 2016 NMHC Annual Meeting in Orlando, former Federal Reserve Chairman Ben Bernanke was fairly bullish about the state of the U.S. economy.

Paul Fiorilla

By Paul Fiorilla

Orlando—Recent bad financial news, including the 10 percent sell-off in U.S. stock prices and plummeting oil prices, are not a sign that a recession is imminent, according to former Federal Reserve Chairman Ben Bernanke.

Speaking at the 2016 National Multifamily Housing Council Annual Meeting in Orlando, Bernanke, now a Distinguished Fellow in Residence at the Brookings Institution, was fairly bullish about the state of the U.S. economy. He pointed to strong job growth, low unemployment, the country’s demographic profile (such as the healthy birth rate and immigration), the health of the U.S. technology industry and the entrepreneurial culture as positives that should produce growth in upcoming years.

“Overall, there is a lot to be optimistic about,” he said. “The U.S. isn’t going gangbusters, but we are the envy of the world right now.”

Bernanke attributed the stock market drop to fears of a hard landing in China’s economy, the potential collapse of the Chinese financial system and the effect of lower energy prices on countries that rely on commodities for income. He said the stock declines are a “negative on the margins,” because it could lead to a loss of consumer confidence and willingness of consumers and businesses to spend and write loans.

“On the one hand, the decline in the stock market is not a recession,” he said. “That being said, it’s not a good thing that the stock market is going down.”

Asked if the markets could be predictive, Bernanke said, “possibly, but there is no evidence we are in or about [to start] a recession.” Later, he said, “my advice is to stay calm and pay attention to what is going on” in the economy.

Bernanke likened China to a larger version of Pittsburgh, an economy evolving from a manufacturing base to a more consumer-oriented model, plus it is evolving from a central planning model to a more market-oriented model. The result will take time to get straightened out and go through some rough patches.

Bernanke said he expected change in the government sponsored enterprises (GSEs) to move slowly because of partisanship that has made it more difficult to craft legislative compromises. He said the end result will likely be a form of the Corker/Warner bill in which mortgages would be securitized with a government-backed guarantee from the agencies such as Fannie Mae and Freddie Mac. But it will be years before any structure is finalized. “Compromise is a dirty word right now,” he said.

Moderator Bob DeWitt, president of GID, asked a number of questions about Bernanke’s role in the financial crisis. Along with former Treasury Secretary Henry Paulson and others, the regulators crafted solutions that prevented a global financial market meltdown.

Bernanke recounted the skittishness of former President George W. Bush and Congressional officials reacting to the proposals that they largely did not understand and were extremely unpopular with the public. He also downplayed the idea that the crisis was caused by origination of subprime mortgages, noting that the actual loss of wealth on defaulted subprime mortgages was less than “a bad day at the stock market” and not nearly enough to tank the financial system. Instead, the bigger problem was the fact that the mortgages were tied up in complex securities and derivatives that multiplied the losses. He said banks did not have the ability to evaluate their exposure to derivatives and complex instruments.

Bernanke saved his biggest ire for the derivatives team at AIG, which was insuring huge amounts of financial derivatives without having set aside sufficient reserves to pay in the event of losses. He said the AIG trading team seemed to assume that they would be bailed out if their bets went bad. “Their attitude was ‘heads I win, tails you lose,’” he said. AIG lost more than $100 billion in one year and was bailed out by the government, which was eventually repaid.

Asked by DeWitt if he still considered himself a “New Keynesian,” Bernanke said he did because he believes monetary and fiscal policy can help the economy. “A stable well-functioning financial system is critical to the health of the overall economy,” he said.