Wednesday, April 27, 2011

Bernanke Speaks

I watched most of Ben Bernanke's press conference today.  It was history making if only for the fact that this was the first press conference in the history of the Federal Reserve.  Bernanke's extreme nervousness was actually apparent on camera.

Beyond the "first ever" aspect of the conference, however, there was nothing noteworthy about it.  Bernanke assured us that he supports a strong dollar and low inflation.  He was asked questions about rising oil prices to which he correctly replied that the Fed can't do anything about oil prices because the Federal Reserve cannot produce more oil.  Apparently the Fed also does not have a bag of jobs for unemployed Americans (you think?) and therefore cannot do anything about long-term unemployment.

One of the final questions of the conference was asked by a CBS reporter who asked Bernanke why he decided to do a press conference and what concerns he had as he anticipated the conference, a question so ridiculously softball that Bernanke responded, "Thanks, Mom," before answering it.

While the conference contained a lot of questions about issues that Bernanke really has no control over--rising gas prices, for instance--it was largely devoid of specific questions about policy and regulations that the Fed does control.  For instance, in discussing the frustration of the American people with the slowness of the recovery, Bernanke mentioned that the crisis was triggered by a bubble in the housing market, and that normally construction in and out of the housing market would be a factor in a recovery, but that no such construction is taking place.

What Bernanke failed to mention, and what the press corps failed to ask, was the impact that specific policies have had on the housing market.  For example, the constraints of the Dodd Frank bill and the Federal Reserve's heavy-handed rule making in response to the bill have already shut down most smaller competitors in the mortgage community.  Small originators and brokers are being forced out of business; small community banks are closing their mortgage departments.  The lack of access to mortgage credit is part of what is tightening credit and keeping a housing recovery from happening.

Yesterday, the Standard & Poors/Case-Shiller index for 20 major U.S. cities was released, indicating a 3.3% drop in housing prices from February of 2010.  According to David Blitzer, chairman of the index committee at Standard & Poors, "There is very little, if any, good news about housing. Prices continue to weaken, while trends in sales and construction are disappointing."

The Fed has announced that its controversial QE2 program will end in June.  When Bernanke was questioned about the possible effects on interest rates, he responded that the quantity of bonds retained by the Fed is more crucial to rates than the quantity purchased, but he also indicated that the board will be making decisions about reducing its portfolio of Treasury and mortgage backed securities.  As that happens, mortgage interest rates will rise.  While higher yields on mortgage-backed securities is good news for investors, it is bad news for homebuyers and borrowers.  And with tight new credit restrictions such as those proposed in the FDIC's Qualified Residential Mortgage plan which would cap debt ratios at 36% of a borrower's income, rising interest rates will make qualifying for a home much more difficult.  According to the Mortgage Bankers' Association only 30% of the loans sold to Fannie Mae and Freddie Mac in 2009 would have qualified under the guidelines of the qualified residential mortgages, but interest rates in 2009 were extremely low.  If rates go to 6.5% or 7%, a 36% debt to income ratio ceiling will make qualifying almost impossible for borrowers.

Maybe a harder line of questioning for Bernanke could have included how the Fed's policies, and the policies of the U.S. government, are cutting off access to credit.  Without access to credit, the economy will continue to plunge into double dip recession and no amount of press conferences and photo ops will save Bernanke from the court of public opinion.

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