Bernanke: Economy Slowing, GDP Flat in 1H ’08

Fed Chair Bernanke is testifying in front of the Joint Economic Committee on The economic outlook for the US.

Key takeaways:

Credit
– Recent Fed actions appear to have helped stabilize the situation somewhat;
– Financial markets remain under considerable stress;
– Pressures in short-term bank
funding markets have
increased once again;
– Lenders have been reluctant to provide credit to
counterparties, especially leveraged investors, and have increased the amount of
collateral they require;
– Corporate debt market yields and spreads have been falling more
recently

Labor, Wages & Income
– Demand for labor has also moderated
– Claims for unemployment insurance have risen
– Unemployment is expected to move higher in coming months
– Declining home values and tighter credit conditions, have caused consumer
spending to decelerate considerably
– Tax rebates, fiscal stimulus package recently will provide some support to consumer spending in coming quarters;

Inflation
– Real disposable income increased at only about a 1 percent annual
rate, reflecting weaker employment conditions and higher prices for energy and food;
– Price index for personal consumption expenditures rose 3.4 percent%
– Sharp increases in the prices of crude oil and agricultural products;
– Decline in the foreign
exchange value of the dollar has boosted some non-commodity import prices;
– We expect inflation to moderate in coming quarters.

Conclusion
"Clearly, the U.S. economy is going through a very difficult period. But among
the great strengths of our economy is its ability to adapt and to respond to
diverse challenges. Much necessary economic and financial adjustment has already
taken place, and monetary and fiscal policies are in train that should support a
return to growth in the second half of this year and next year. I remain
confident in our economy’s long-term prospects."

This morning on Bloomberg, a headline crossed stating that Bear Stearns had approached the Fed to discuss the plans of their imminent bankruptcy filing.

Video:

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Questions about Bear Stearns are expected to dominate the Q&A portion.

Fed_panic_button

Source:
The economic outlook
Chairman Ben S. Bernanke
Before the Joint Economic Committee, U.S. Congress, April 2, 2008
http://www.federalreserve.gov/newsevents/testimony/bernanke20080402a.htm

Fed Aided Bear Stearns as Firm Faced Chapter 11, Bernanke Says
Yalman Onaran
Bloomberg, April 2, 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7coicThgaEE&

Related:
What Congress and Investors Should Understand About the Bear Stearns Deal
John P. Hussman, Ph.D.
March 31, 2008
http://www.hussmanfunds.com/wmc/wmc080331.htm

Fed Should Clarify Link to Bear Stearns Assets
Caroline Baum
Bloomberg, April 2, 2008
http://www.bloomberg.com/apps/news?pid=20601039&

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What's been said:

Discussions found on the web:
  1. Vermont Trader commented on Apr 2

    Quote from Bernakee speech… They went to fed on Thursday, 3/13//

    “The Primary Dealer Credit Facility was put in place in the wake of the near-failure of Bear Stearns, a large investment bank. On March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for Chapter 11 bankruptcy the next day unless alternative sources of funds became available.

    This news raised difficult questions of public policy. Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company. Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets. With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence. The company’s failure could also have cast doubt on the financial positions of some of Bear Stearns’ thousands of counterparties and perhaps of companies with similar businesses. Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain. Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability. To prevent a disorderly failure of Bear Stearns and the unpredictable but likely severe consequences of such a failure for market functioning and the broader economy, the Federal Reserve, in close consultation with the Treasury Department, agreed to provide funding to Bear Stearns through JPMorgan Chase. Over the following weekend, JPMorgan Chase agreed to purchase Bear Stearns and assumed Bear’s financial obligations.”

  2. michael schumacher commented on Apr 2

    None of these banks will be allowed to fail. If they file then the books get opened up so we see (or what they provide) how they caused this mess. They also stand a large chance of having a judge tell them to return the bonus’ that were collected for at least the last year. Messy things like truth, reality and actual fiduciary responsibility would be the outcome of that but not in this world.

    Keeping the books private is what is going on here…

    How he has any credibility at this point is just beyond rationale thought.

    Ciao
    MS

  3. Greg0658 commented on Apr 2

    16) BN 9:07 Arbitrage Profit in U.S. Takeovers Pending on April 2 (Table)

    Looks juicy!! :-)

  4. The Middle Class Implosion commented on Apr 2

    Bear Sterns may go bankrupt after all ?

    Scroll down this page and look for: This morning on Bloomberg, a headline crossed stating that Bear Stearns had approached the Fed to discuss the plans of their imminent bankruptcy filing I guess a JPMorgan deal and a federal bailout

  5. wunsacon commented on Apr 2

    Well, he has “credibility” to continue doing what you described: bail out the most interconnected banks and keep their books private.

  6. SPECTRE of Deflation commented on Apr 2

    How CONgress has any credibility is beyond me. These clowns are clueless! Where the Hell were the CONgress critters while all this went on? They have OVERSIGHT on ALL this for God’s sake.

  7. SPECTRE of Deflation commented on Apr 2

    I can’t wait until the “Teddy the swimmer” asks a question. Do we have interpreters so that we can figure out what the Hell he asked?

  8. CEsqy commented on Apr 2

    If the banks are too big to fail, then they are a money monopoly and should be split into smaller financial institutions. Why are the regulators taking the smaller BS and merging it into the larger JPM? Doesn’t having a larger institution increase the moral hazard of a larger bailout or collapse in the next economic crisis? Congress and the “unregulators” should be breaking the “unfailable” larger organizations into a smaller units that can be digested without moral hazard. IMO
    cesqy

  9. JohhnyVee@tahoo.com commented on Apr 2

    The bail out for all housing is underway…government refinancing is going to be the deal of the century. Don’t miss out because one will need a great mortgage rate to offset all the increases in the stuff needed to survive.

  10. SPECTRE of Deflation commented on Apr 2

    So we are gonna spend $300 Billion to keep people in homes they could never really afford in the first place. Brilliant thinkers in Washington. Frigging morons!!!!

  11. Andrew commented on Apr 2

    Who was the idiot Rep. Sanchez and why is she on this committee. She sounded like she knew absolutely nothing about even the most basics of finance or economics.

  12. Mr. Obvious commented on Apr 2

    All news is good news. There is no bad news anymore.

    Also, the Fed’s justification for saving BearStearns is evidence that they are going to backstop the entire market. “To prevent a disorderly failure of Bear Stearns and the unpredictable but likely severe consequences of such a failure for market functioning and the broader economy…” You can say that about any of the big overleveraged financial institutions.

    There’s no sense in fighting the Fed at this point.

  13. Sammy20 commented on Apr 2

    Did anyone see this quote? I can’t believe he said this!!

    The Federal Reserve and other government agencies have learned a great deal about managing economic affairs since the Great Depression, Federal Reserve Chairman Ben Bernanke said Wednesday. “Financial instability, which was not addressed by government…was a major contributor both to the depression in the U.S. and abroad. I believe the difference today is that we will address financial issues and try to maintain the integrity of our financial system,” Bernanke said. “We will not let prices fall at 10% a year,” he said.

  14. SPECTRE of Deflation commented on Apr 2

    The CONgress abdicated their responsibility to oversee the FED and markets long ago. Everyone of the jackarses had oversight, but they were so busy backslapping each other that they didn’t bother with oversight. The Federal Receipts were rolling in, and who really wants to spoil a party?

  15. Ross commented on Apr 2

    An honest question.

    How does the Fed manage the hedge fund problem? Through the banks/I banks or direcly? Hedge funds have more equity capital albeit levered many times than the Fed’s book.

    Perhaps the Fed is the hedge fund of last resort?

  16. michael schumacher commented on Apr 2

    ross-

    based on what they are now accepting for collateral it sure is now….

    Ridiculous way to be a “good steward of the economy”

    Ciao
    MS

  17. SPECTRE of Deflation commented on Apr 2

    Can we rename them The Joint Committee of Baffoons? Pretty please!

  18. VennData commented on Apr 2

    Spectre’s right, the GOP-controlled Congress failed in their duty. Though much direct regulation is in the hands of the GOP-appointed Fed (Greenspan/Reagan Bernanke/Bush,) Treasury (the revolving GOP-donor door,) Comptroller etc… since they are the regulators.

    The GOP has failed the nation horribly (i.e. where were Congressmen Foley and Senator Larry Craig?)

  19. SPECTRE of Deflation commented on Apr 2

    Andrew, Hell half of them don’t know the difference between Paulson and Bernanke. I kid you not.

  20. SPECTRE of Deflation commented on Apr 2

    Venndata, I hate to bust your bubble, but they all suck. Anyone who thinks it’s one group is riding on the short bus.

  21. blin commented on Apr 2

    You could just feel the bankers/IB connivng thoughts these days.

    The Fed can’t let us fail….hmmmm…so that means…hmmmm… since we are so interconnected…well we can create new products that nobody understands…that generate huge immediate profits… then…….who cares…since the FED can’t let us fail.

    God bless the FED!

    …or not!

    You know that’s how they’re thinking.
    When does congress wakeup and catch on?

  22. SPECTRE of Deflation commented on Apr 2

    Let me put this bluntly, we are screwed folks. Ron Paul is the only one who knows what’s going on and is willing to say so. The rest are actors who are clueless. The American people don’t want the truth, or we would be in a much different place right now. Bread and Circus for the subjects!

  23. pr commented on Apr 2

    I loved BB’s comment that he thought “long and hard” about the BS bailout. Sure: he was told about the imminent Ch 11 filing Thursday evening, convened meetings with JPM and had the loan in place by the next morning. Let’s hope he doesn’t start making any quick and easy decisions!

  24. SPECTRE of Deflation commented on Apr 2

    Ross, there is nobody regulating Hedge Funds, nor is there any desire to do so based on what I’m hearing. $515 TRILLION in Derivatives says this is gonna end very badly, but party on Garth. This Congresswoman on now didn’t know who Bernanke or Paulson was at an earlier Q and A.

  25. SPECTRE of Deflation commented on Apr 2

    pr, like in a New York minute. LOL! If they let BSC blow up, it would of blown everything up because of the derivatives market. They are only notional if you have a counterparty that can pay. OPPSY!!

  26. DonKei commented on Apr 2

    The housing market is effectively nationalized (FNMA, FHLB, Freddie, et. al).

    The investment banks are now (Bear bail-out) as always were the commercial banks (FDIC).

    It will all come to rest on the dollar. He is to be crucified. The fed will be his Pontious Pilate.

  27. BG commented on Apr 2

    I wonder what will happen when the Fed loses all credibility around the world, really?

    Think about it. These financial crises are occurring closer and closer together. 1987, 1997, 2000/2001 and now 2007/2008.

    You can bet your left testicle that there will be another crisis of some sort in the near future, maybe in the next few weeks or months. Who knows?

    It’s not a matter of if, but when. And according to Fed doctrine, BB will go in and “fix it” and later go to Congress and sing kumbaya.

    Well the rest of the world will be watching and our debt levels will continue to sky-rocket and the value of the dollar will plummet AND holders of our debt will be demanding a higher rate of interest to hold our debt in dollars.

    This higher rate of interest demanded by the holders will be our undoing. The principal (~current national debt + future liabilities) is now so large, any significant increase in the finance rate will consume the entire US budget just to service it.

    Oh well, I won’t live over another 30 years or so anyway. I guess the thing that disappoints me most is that no one has the guts to do anything about it. Financial greed and politics will never reach a compromise until it is an unmitigated financial Pearl Harbor and the enemy is coming ashore.

    Beware. This most recent fix has only shown the way for more dire financial crises in the future. Interestingly, I think the guy above who suggested a splitting up of financial institutions too large to fail is on to something.

    A break-up of these guys would absolutely serve as a deterrent for these kinds of financial shenanigans in the future. If the institution screws up so badly, that it must be saved from itself then it should be broken down into smaller more managable pieces and be cleaned up.

    Maybe the size of the institution should be made inversely proportional to the risk it takes in the market place. Think about it. No single financial institution should be allowed to become so big that its tentacles could take down the entire financial system. That’s just plain crazy!

  28. Stuart commented on Apr 2

    “Bear Stearns-gate” was purely to avoid price discovery and counter party failure. Ethical and legal lines were absolutely crossed but were clearly considered less important. We have tangible evidence of how serious the Fed and the Treasury view current financial circumstances….all fueled by plummeting home values and we’re only 1/4 – 1/3 the way through mortgage resets. One wonders how serious the Fed and Treasury will view matters when we’re 2/3rds the way through resets…and after another 20% drop in home values (think collateral). A movie could be made from all the collusion and backroom deals cut over the past two weeks…

  29. Ross commented on Apr 2

    That show reminded me of the movie “Never On Sunday’ with Melina Mercouri and Jules Dassin. Mercouri is a prostitute who works 6 days a week and goes to Greek plays each Sunday.

    Dassin, the frumpy pseudo-intellectual accompanies her one Sunday and is amazed when during the killing in the tragedy, she laughs and claps.

    When asked why, she replied “They didn’t really die because at the end of the play, they all come onstage and smile and kiss each other. Then they all go to the beach for a picnic!”

    She was the only one who understood absolute reality. Kinda like Ron Paul.

  30. Stuart commented on Apr 2

    Well, reading BB comments it’s as plain as day. There we have his admission. No major IB or MCB will be allowed to fail as they’re all too interconnected. If one goes, we all go. The taxpayer ultimately is now backstopping the collective liabilities of the big banks, the products of their greed and stupidity is now in our laps. Privatize gains, socialize losses. There’s a snowballs chance in hell this was no pre-conceived by someone, somewhere inside the hallways of the Fed, Treasury dept or a major bank all the while this crisis was brewing as regulators, govt officials were asleep, complicit or plain incompetent. US taxpayer, bendover and grab your ankles and just picture the face of Uncle Sam.

  31. BG commented on Apr 2

    One last tidbit.

    As certain parties have observed and taken note of the symptoms of this most recent financial crisis and the eventual “solving” of it is no different than the observation taken with the rise of 28 dollar oil’s move to over 100.

    It’s kind of like the theft staking out a place he intends to rob later.

    The knowledge, understanding and future ramifications of what has been witnessed in 1)the upward movement in the price of oil and 2)the financial Ponzi scheme (and our response to it) are two huge occurrences that we would have greatly benefitted from if they had never taken place.

    In other words, the genie is out of the bottle on both of these issues now and everybody around the world is aware of them. I’m thinking exploitation if you catch my drift.

    Come to think of it, exploitation is just another form of leverage isn’t it?

  32. Greg0658 commented on Apr 2

    BG reiterates – I think the guy above who suggested a splitting up of financial institutions too large to fail is on to something

    I’m wondering does the US Government fall into that, meaning, put the States in more control

    this blog post from BR (032608) to me, seemed someone in North Carolina saw the housing mess coming and put in some stops

    http://bigpicture.typepad.com/comments/2008/03/new-home-sales.html#comments

  33. Tom commented on Apr 2

    Despite recent rallies, as long as Wednesdays continue to be down days, we are in a bear market.

  34. kio commented on Apr 2

    When the Fed completely misinterpretes everything it is more than a crime – this is a mistake.

  35. jkw commented on Apr 2

    If the banks are too large to fail, than they should be taxed at a rate that will cover their losses. To offset the costs of bailing out the banks, we should raise capital gains taxes to much higher levels. We should raise taxes on higher incomes, so that the government will be able to claim a substantial portion of the $20mil+ bonuses that these CEOs are making by taking risks they will be bailed out of. It’s only fair.

  36. Pat G. commented on Apr 2

    “- We expect inflation to moderate in coming quarters.”
    How long have they been touting this now?

  37. Winston Munn commented on Apr 2

    “We expect inflation to moderate in coming quarters.”

    “But then, we also expected greed, avarice, and euphoria to moderate 3 years ago, so there ya go.”

  38. Stuart commented on Apr 2

    “We expect inflation to moderate in coming quarters.”

    Hmmm… didn’t they also expect this “sub-prime” mess to be contained too?

  39. Tom commented on Apr 2

    Kiss our Republic good-bye. We have fascism here; big business, big military and big government in bed together. Akin to 30’s Germany

  40. SPECTRE of Deflation commented on Apr 3

    Henry Blodget | April 2, 2008 8:21 AM

    Goldman Sachs (GS) taking the rest of Wall Street to the cleaners is nothing new, but now comes word that Goldman played a direct role in the destruction of Bear Stearns (BSC). According to Fortune’s Roddy Boyd, several days before the collapse, Goldman decided to stop backing up Bear Stearns derivatives deals–and it announced this decision to hedge-fund clients in an email that spooked an increasingly panicked Wall Street:

    [On the morning of Tuesday, March 11], Goldman Sachs’s credit derivatives group sent its hedge fund clients an e-mail announcing another blow. In previous weeks, banks such as Goldman had done a brisk business (for a handsome fee, of course) agreeing to stand in for institutions nervous, say, that Bear wouldn’t be able to cough up its obligations on an interest rate swap. But on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals. (A Goldman spokesman asserts that the e-mail was not a categorical refusal.)

    “I was astounded when I got the [Goldman] e-mail,” says Kyle Bass of Hayman Capital. He had a colleague call Goldman to see if it was a mistake. “It wasn’t,” says Bass, who is a former Bear salesman. “Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them”…

    When word of the Goldman e-mail leaked out, the floodgates opened. Hedge funds and other clients, eventually running into the hundreds, began yanking their funds.

    The next afternoon, Bear CEO Alan Schwartz announced on CNBC that everything was hunky-dory (which, according to Boyd, it wasn’t). And two days later, Bear Stearns effectively went bankrupt.

    Should Goldman be blamed for this? Absolutely not. Bear Stearns was under-capitalized, over-leveraged, and stuffed to the gills with crappy debt. Once again, Goldman seems to have outsmarted the rest of Wall Street, spotting a problem before everyone else did. Because “runs on the bank” are often started when smart players cut and run, however, Goldman’s decision appears to have at least contributed to the stampede.

    Goldman Sachs: Giving new meaning to “crushing the competition”

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