All times CST...
9:10~~"Investors were led to question the reliability of the credit ratings for a range of financial products, including structured credit products and various special purpose vehicles." [Indeed!]
9:13~~"Larger balance sheets and unexpected losses prompted banks to become protective of their liquidity and balance sheet capacity, and thus to become less willing to provide funding to other market participants, including other banks. Banks have also evidently become more restrictive in their lending to firms and households. More expensive and less available credit seems likely to impose a measure of restraint on economic growth." [Yes. Yes. And yes. This is the whole story. In an economy fundamentally dependent on credit expansion, credit contraction is a cold-blooded killer.]
9:15~~"Thus far, the public's expectations of future inflation appear to have remained reasonably well-anchored....Overall and core inflation should moderate this year and next, so long as the public's confidence in the Federal Reserve's commitment to price stability in unshaken. However, any tendency of inflation expectations to become unmoored, or for the Fed's inflation-fighting credibility to be eroded, would greatly complicate the task of sustaining price stability and would reduce the central bank's policy flexibility to counter shortfalls in growth in the future. Accordingly, in the months ahead, we will be closely monitoring the inflation situation, particularly inflation expectations." [And with that, equities fell off a cliff. Should be an interesting day!]
9:20~~Fiscal and monetary stimulus could work well together. But fiscal stimulus could be "quite counter-productive" if it's poorly-timed or compromised fiscal discipline for the longer term. [Truly!]
9:21~~If you do it, do it soon and keep it temporary.
9:23~~We're pretty sure the Chairman just said he expects the housing market contraction to "wane...sometime during this year." [We think he's done pretty well so far, but this is a real howler.]
9:24~~The Fed's base case still isn't recession. It's slow growth.
9:27~~John Spratt asks how we got here in the first place. Bernanke: A "confluence of factors," one key being the housing boom and bust. [This answer feels like a bit of a punt.]
9:30~~We regulators have some serious work to do as we think about how to move forward from here. It won't be easy.
9:32~~Paul Ryan asks an interesting question. Why did the ECB leave rates unchanged when they're facing a slowdown as well? Bernanke: Conditions not the same. Their housing market isn't as bad. They do face some credit market problems. Our slowdown looks worse than those in Europe and Asia.
9:34~~Biggest problem so far has been in subprime mortgages with adjustable rates. So far losses there have been roughly $100 billion. But it certainly could be several multiples of that as delinquency and foreclosure rates rise. [Looks like the "containment" of the "subprime" problem has been pushed down the memory hole.]
9:37~~Interbank lending breakdowns make monetary policy less effective. But our liquidity-related efforts have had some success. [That seems about right.]
9:39~~[Larry Kudlow just smiled for the first time in a while as Bernanke points to the TIPS spread as the best indicator of inflation expectations.]
9:41~~[This is not a political endorsement and has nothing to do with his politics whatsoever, but we have to admit: Wisconsin's Paul Ryan just asked the best set of serious, programmatic, not-obviously-self-serving, non-grandstanding, even sophisticated questions we've ever seen at one of these congressional events. Good for him.]
9:44~~Long-term fiscal responsibility is the thing. Those who want low taxes need to spend less. Those who want to spend more need to find the revenue to do it.
9:46~~Question: Would $100 billion in a $14 trillion economy matter? Bernanke: It would be significant. It wouldn't be window-dressing. [We're not so sanguine on this, but as the Chairman noted earlier, the bigger questions are timing and targeting, and those are things Congress will struggle with almost by definition.]
9:48~~Statement: As late as 2005, Greenspan said he saw problems in local areas, but little chance of a nationwide bubble-collapse. Easy Al's damning words: "Not a particular problem." [Oops.]
10:10~~The securitization model has its problems. We need greater transparency across the board.
10:12~~Question: How do we deal with incipient stagflation? Bernanke: You've put your finger on a very difficult problem. We have two objectives and one policy instrument, and we need to balance those risks appropriately. Inflation expectations seem reasonably well-anchored. Our sense, and we have to look forward because of the lagged effects of our policy moves, is that headline and core inflation will moderate over the next year or two. Then again, futures markets and the Fed have consistently underestimated the increase in oil prices. Our ability to respond to growth shortfalls is critically dependent on maintaining our credibility for keeping inflation low. We can't ignore medium-term price stability. Not only have we had growth issues and inflation issues, we've had financial market turmoil as well.
10:15~~Question: Any clubs left in the Fed's bag? Bernanke: We're focused on liquidity to help markets work better, and monetary policy. We'll stick with those for now.
10:25~~Question: Isn't the bigger picture still relatively bright? Bernanke: We have lots of strengths: Flexible workforce, high productivity, technology. Over the longer term, the American economy should perform well. We have issues of education, health care, the fiscal picture. Every economy goes through ups and downs, and right now we're in a slow period.
10:30~~Whatever our long-term strengths, we can't ignore the short-term challenges.
10:32~~[An aside while the grandstanding grinds on: The S&P 500 is now trading below its intraday low of March 14, 2007.]
10:42~~With one-time payments or tax credits, the biggest bang for the buck comes from those that go to low- and moderate-income people. There's a little more debate in the econometric literature on the question of what sort of business tax breaks demonstrate the most pronounced or durable effects.
10:48~~High oil prices take a double toll: They depress spending by crimping business and household budgets. And they're inflationary.
10:59~~[For what it's worth, we very much appreciate Bernanke's common sense on the ideologically charged issues of taxes and spending.]
11:02~~High oil prices do have one benefit: They encourage "suppliers and demanders" to try to find and use alternative sources of energy.
11:17~~[The energy of this thing seems to be dissipating...thanks largely to the backbenchers' weak combination of grandstanding and cluelessness.]
11:19~~Subprime lending done right is a good thing for individuals and the economy. We need to regulate this part of the marketplace, but not in a way that's so onerous that it shuts the system down.
11:23~~North Carolina's Bob Etheridge stakes his claim for our "Genius of the Hearing" award with this: "And I agree with you. The three T's: Timely, targeted, et cetera."
SUMMARY: Bernanke's plenty concerned about inflation expectations. He expects 2008 to be weak, but stronger in the second half than the first. Fiscal stimulus, if done right, could help as part of a policy response that also includes the Fed's monetary policy moves. Nevertheless, members of Congress shouldn't lose sight of long-term fiscal discipline. And members should fight their other fights (long-term tax policy, &c.) outside of their discussions of short-term stimulus. All things considered, we think Bernanke did exceptionally well today: Clear-minded, not politically compromised, and sober about the short-term environment (if a little too sanguine on the probability of a meaningful near-term bottom in housing).
