One line in Federal Reserve Chairman Bernanke’s testimony dominated the week, but in an odd way: it was an anti-forecast. "Uncertainty about the outlook for growth and unemployment … greater than normal …"
The stock market took it as good news (in that never-never land, the only uncertainty is how high it will go), but bond and mortgage people took it the other way — the 10-year T-note briefly fell to 2.88 percent (a 15-month low), with mortgages still near 4.5 percent.
Fed policy is established by six governors appointed by the nation’s president and confirmed by Congress, and six of the presidents of 12 regional Feds (the voting rotates). The appointed governors tend to be a sharp lot; the regional presidents tend toward an uneven mix of able people and narrow, pinched, country bankers — hard-money types who think people should be punished for their mistakes (and several times for each one).
In these deliberations, prediction is power. In two ways: all central banks battle "policy lag," the six to 18 months it takes for Fed action to bring full result on an economy that by then may look a hell of a lot different than it did when the action seemed appropriate.
Policy lag forces the Fed to pre-emptive measures, trying to get in front of events already taken place. Second: voting governors and Fed staff cannot float ideas just because they sound cool — policy must have solid foundation in the econometric computer models assembled and tweaked in the last 50 years.
Since July 2007, these models might as well have been spittoons. From the onset of unprecedented bank-on-bank wholesale run all the way to the Lehman "domino" in September 2008, the Fed was behind, sticking to traditional rate cuts and liquidity.
The Fed understood the Lehman disaster, and in the following winter mostly on its own stopped the run by effectively guaranteeing every deposit and liability in the financial system. By March 2009, running against the Fed was silly, and so it stopped.
Since then, many have taken credit for preventing a new Depression, with the Obama stimulus and bank stress tests in the lead. The stimulus was worth trying, and the tests were more sham than substance — the Fed had already done the prevention.
Since spring 2009, the Fed’s and Obama administration’s war on recession has been "sitzkrieg" (more "sit" than "blitz"). The duds at the Fed are worried that it is too easy, with inflation ahead.
The enlightened cannot say the duds are wrong: All of the models promise that monetary ease and rates like these will bring recovery. In the last three months, the economy has been in obvious slowdown.
However, nobody knows if this is a blip or a double dip, or if a real recovery is under way, or if we’ve entered a flat "New Normal," stabilizing unevenly.
Of all components of the economy, housing is the one most out of whack. MGIC, the mortgage insurer, on July 1 released its new market-conditions guidance. It rates the 73 biggest metro areas "strong, stable, soft or weak," and a similar scale for trend.
Of the 73 not one is strong, and only 27 are stable; all the rest soft or weak (24 weak). Of the stable 27, 12 are softening. Of all 73, three (count ’em) are rated "improving" — my backyard, Denver, from soft; Washington, D.C., likewise; and Santa Ana, Calif., from weak.
To illustrate the "dud-Sharpie divide" at the Fed (and elsewhere), and frozen policy, consider Richmond, Va., Fed President Jeffrey Lacker, in July: "Housing is such a small portion of the economy now — it’s a little less capable of doing damage."
As wrong as I think these people are, it is possible that one day soon a frightened soul will creep from her bunker for a quick recon outside. Markets always ignite by accident, and often when everyone knows they can’t.
All it takes is enough people yelling back down to bunkers, "Hey, Harry! That house you’ve been talking about for 10 years … a loan for three hundred grand only costs $1,500 a month! Get outta there. While you’re at it, get some sun."
I have no idea how close we are to that blessed moment, and the general economic ignition that would quickly follow, but I do know that it’s housing first, then consumer spending and sales volume, and then jobs.