It’s time for your close-up, Ben Bernanke.
All eyes were on the Federal Reserve chairman as he delivered a speech from a conference in Jackson Hole, Wyo. Could Bernanke tell us about some miracle cure for the ailing U.S. economy? No, Uncle Ben could only tell us what we know: the Fed is ready to administer medicine if the economy continues to slow, but he didn’t write the prescription yet.
The speech was a rehash of the official central bank statements — the pace of economic recovery is slowing, but it should pick up in the second half. If not, the Fed will deal will figure out something at its September meeting. Blah, blah, blah.
The was not what people wanted to hear, especially less than two hours after learning that growth was worse than originally thought in the second quarter. The government released revised growth figures for the U.S. economy: in the second quarter, GDP grew at an annual rate of 1.0 percent, down from the initial estimate 1.3 percent. This follows the paltry 0.4 percent growth rate for the first quarter.
To put it bluntly, U.S. growth stinks. The current recovery, which began two years ago, has seen annual growth of 2.5 percent, less than half the rate enjoyed during previous recoveries. Here’s the bad news: Dr. Bernanke can’t save the ailing economy now, nor can he do so at the September FOMC meeting. For proof, we have a perfect example: the medicine known as QE2.
Last year, we were also experiencing a slow down in growth and a sinking stock market. With its primary interest rate already at zero, the Fed had used up its normal ammunition and had to turn to the emergency measure that it employed during the financial crisis — bond buying. Between March 2009 and March 2010, the Fed bought nearly $2 trillion in mortgage-backed securities, Treasuries and agency debt under the program known as “quantitative easing.”
With growth fizzling, Bernanke used last year’s Jackson Hole conference to discuss how the Fed could directly buy bonds to boost the then-stalling economy. It was the first time he spoke about Quantitative Easing 2 or QE2. The effect of the announcement was to spark a 20 percent, multi-month stock market rally through the end of 2010.
QE2 didn’t actually begin until November, which was when we learned that the plan was to purchase $600 billion of government bonds through the end of June, 2011. In hindsight, we know that QE2 didn’t spur growth-just look at the GDP numbers! Nor did QE2 improve the employment picture or help housing, but it did goose stock prices — during the actual period that QE2 was in place, the S&P 500 jumped by close to 30 percent.
So why are we hanging our hats on Bernanke’s every last word? Because we are desperate! The three engines of U.S. economic growth — consumers, government and corporations — are radio silent right now. Consumers are still busy paying down the mountain of debt they accumulated over the past decade; the government is in big-time austerity mode after the debt/deficit negotiations; and corporations, which are making lots of money (in this morning’s GDP report, we learned that after-tax profits grew at the fastest pace in a year), are keeping the money, not boosting wages or creating jobs.
Bernanke can’t address the bitter truth: the medicine in his black bag can’t cure the ailing patient.
Jill Schlesinger is editor-at-large for CBS/Moneywatch. Listen to her Morning Report interview for more on Ben Bernanke’s speech, and visit her CBS blog for more analysis.
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