By. Robert T.Stephenson
February 9, 2017
The CFA Society Boston hosted its 31st Annual Market Dinner on February 2nd, and the featured speaker was Ben Bernanke. Mr. Bernanke served two terms as Chairman of the Federal Reserve from 2006 to 2014. During that time he oversaw the Federal Reserve’s response to the late 2000’s financial crisis. Mr. Bernanke has since been succeeded by current Fed Chairman, Janet Yellen. J.P. Marvel’s Director of Research Robert T. Stephenson attended the event and had the following report:
Mr. Bernanke began his talk by reviewing the great progress the US has made since 2009. He commented that the US economy has experienced GDP growth and job creation basically every quarter since 2009. GDP is now 12% higher than pre-crisis peak, and unemployment is now below 5% with 60mm jobs created since 2010. Inflation was high at the peak of the crisis but is now under 2%. Housing is in great shape with mortgage rates remaining low and home prices steadily rising. The economy is at Fed estimated targets, and the Fed has indicated it would like to raise rates gradually and modestly over the next few years.
Looking forward, Mr. Bernanke is optimistic and does not see an elevated risk of recession this year. Consumers and households are in good shape financially. Household debt is low and consumer confidence is high, and Mr. Bernanke expects households and consumers to continue to power the economy.
Financial markets have been relatively strong since the election. In Mr. Bernanke’s opinion, the stock market’s positive move reflects a widespread belief that the economy is in a pro-growth environment similar to the 1980’s, ripe with tax cuts and defense spending. During the 1980’s, fiscal deflation led to a stock market boom, a strong dollar, and high interest rates. Today’s investors are expecting similar Reagan-like policies of reflation, tax cuts, and infrastructure spend from the new administration.
Mr. Bernanke did comment on the surprise election of Donald Trump. Going into the election, a sizeable number of Americans believed they had not participated in the economy’s recovery and felt politically disenfranchised. Despite a lower unemployment rate, many Americans were still searching for – or had effectively given up looking for – good-paying, high-quality jobs. Voters believed increased global free trade had permanently shipped some of their jobs overseas. Mr. Trump captured the attention of this dissatisfied faction and won its vote. With Mr. Trump’s election, we should expect policy-making to shift toward improving the lives of these “left behind” Americans.
According to Mr. Bernanke though, it is technology and not global free trade that is more responsible for replacing the human worker. Robots, automation, and artificial intelligence have greatly reduced the demand for manpower in many manufacturing and retail industries. Mr. Bernanke speculated some 30% of the labor force might become jobless due to technological advances, and he wonders whether the government will need to step in with financial assistance to prevent widespread poverty.
Because one party now controls both the executive and legislative branches, we should expect government policies to change. Unexpected consequences could arise. Global trade involves supply chains between countries; disrupt the supply lines with new trade treaties and policies, and you are certain to have problems. Changes to healthcare, specifically Obamacare, could have huge negative effects. Unsure of the state of their insurance coverages, Americans could greatly curb their healthcare spend. Asset prices are already reflecting this response: we are seeing interest rates move higher in anticipation of inflation. Much higher interest rates could lead to issues in other areas of the economy such as the housing market. Changes in government policies are needed – we badly need greater infrastructure investment and tax code reform – but we have yet to hear much from politicians on the policy changes that would more obviously yield positive effects.
Although wage pressure is weak and the participation rate is historically low, Mr. Bernanke stated that he believes our economy is operating close to full employment. Like many economists, he sees a continuation of long-term trends and does not expect drastic changes to employment figures for several years to come. The Fed isn’t in a position to make much of an impact, argued Mr. Bernanke, and this means we need to look elsewhere for solutions, namely fiscal policy.
Mr. Bernanke expressed concerns about much of the President’s rhetoric and early maneuvers around international trade. He fears Mr. Trump’s border tax would be a disaster. He also worries that the President’s call for US companies to curtail investment overseas could dramatically harm important alliances with many countries. Big changes in trade supply chains would be difficult because the US economy is massive and highly integrated in the world’s intricate global trading system. Any significant change would be highly disruptive and could slow the US economy in similar fashion to the slowdown of the Chinese economy that began a few years ago. If done in a clumsy and myopic way, trade policy reform could greatly harm our economy, according to Mr. Bernanke.
On financial regulation, Mr. Bernanke has a mixed opinion of Dodd Frank. He agrees with Tim Geithner that the Fed was stripped of some powers during the crisis but allowed to keep and use others. Among these tools was the Orderly Liquidation provision, which provided a process to quickly and efficiently liquidate a large, complex financial companies close failing. In his opinion, if deregulation of Dodd Frank were to occur, Mr. Bernanke hopes the more beneficial parts of it, such as the Orderly Liquidation authority, would remain so that the Fed is not left underequipped.
Mr. Bernanke wrapped up his talk by commenting on how populists typically have had an unjustified dislike of Fed bankers. Public opinion polls indicated an all-time approval low in 2008. Two years later, John Boehner strongly criticized the Fed (politicians often make the Fed a scapegoat because the Fed is an easy target), but Mr. Bernanke argued that the Fed did the right things and in the right manner as it moved through and out of both the financial crisis and Great Recession. In the end, all the Fed can do is be non-partisan and do what is in the best interest of the economy and American people, argued Mr. Bernanke. President Trump and Republican Congressman now have significant power to steer the economy now, and Mr. Bernanke hopes that they have the wisdom and political will to steer it in a positive direction.