Every super hero has a weakness; if he or she were all powerful, the villains would have no chance and there would be no story.
With that in mind, consider U.S. Federal Reserve Board chairman Ben Bernanke. He has been bestowed with the ability to create money, a rare power that he used to defeat his nemesis, the Great Recession.
But the victory wasn’t total.
The economic downturn ended in June, 2009, yet the unemployment rate has yet to fall below 8.1 per cent, which is high by U.S. standards. More than a few innocent bystanders wonder if Mr. Bernanke was victorious at all. According to the Washington-based Pew Research Center, median household income fell 4.1 per cent between 2009 and 2011, only marginally less than the drop during the recession.
So Mr. Bernanke is poised to rejoin the fight. On Thursday in Washington, the Fed’s policy committee is expected to announce fresh stimulus measures. Almost every Wall Street analyst predicts the Federal Open Market Committee will extend the current conditional commitment to leave the benchmark interest rate near zero until the end of 2014.
Many also think the Fed will launch a third bond-buying program, a strategy called quantitative easing, or QE. Both policies aim to influence market conditions to keep borrowing costs low; the former by encouraging consumers, executives and investors to make longer-term bets, the later by creating demand for bonds, which drives up prices and lowers yields.
QE is Mr. Bernanke at his most powerful. The Fed doesn’t draw from its vaults to buy bonds; it creates the money from thin air – so far, more than $2-trillion (U.S.) in separate programs to buy Treasuries and mortgage securities.
It’s an awesome power, but it does have limits.
Mr. Bernanke can create the money, but he has no ability to spend it. All he can do is coax businesses, households and governments to spend and invest, generating the activity that should lead to more jobs. And right now, even if the Fed resorts to QE, Mr. Bernanke will struggle to generate spending. That’s because the United States has morphed into a nation of savers.
Household wealth evaporated during the financial crisis. Pensions were decimated and home prices still are 30 per cent lower than their peak values. As a result, the savings rate has jumped to above 4 per cent from zero ahead of the recession. As long as hiring remains sluggish, there is little reason to expect a meaningful increase in household spending.
Monetary policy works best when teamed with fiscal policy. The Fed’s first attempt at QE worked well because it was done in concert with the Obama administration’s $800-billion stimulus plan, a fiscal jolt that still was reverberating through the economy when QE2 was launched. But now politicians are working against the Fed, as Congress refuses to do anything to avoid the “fiscal cliff,” a combination of spending cuts and tax increases that the Congressional Budget Office says is large enough to trigger a recession next year.
That means it’s up to the private sector to spend. U.S. companies have the means to do so. The recovery is weak by historical standards, but it’s not dead. People are selling things. The companies that survived the recession also are a lot more profitable because they cut to the bone to stay solvent when revenue vanished. The result is record profits.
Non-financial corporations currently hold $930-billion (U.S.) in bank deposits, a 50 per cent increase from before the recession, according to Brockhouse Cooper, an investment brokerage in Montreal. “This sure would be a nice stimulus to the economy if companies suddenly decided to put that cash to good use,” the firm’s economists said Thursday in a research note.
The problem for Mr. Bernanke is that companies appear to be as traumatized as consumers. Brockhouse Cooper’s analysts could find little evidence that managers are inclined to do much with their profits beyond sticking them in the bank – mergers and acquisitions have been stagnant for several quarters and dividend payouts are at their lowest level in 140 years.
The refusal of businesses to spend their cash has inspired a classic economic debate between supply siders and those who believe economic activity begins with demand. John Curtis, a senior fellow at the C.D. Howe Institute in Toronto, says the short-term prospects simply aren’t good enough to coax recession-hardened executives off the sidelines. John Allison, a distinguished professor at Wake Forest University School of Business, says U.S. companies are frozen by uncertainty about what the November presidential election means for future tax rates and regulation. “You’re not having innovation take place, which is what creates the jobs,” said Mr. Allison, who used to run BB&T, the U.S.’s 13th-largest bank by assets. “It is production that creates the job and the production machine isn’t working.”
QE tends to boost asset prices, which could boost consumer confidence, and lower interest rates should encourage mortgages. Maybe the profit motive finally will drive more executives to seek a better return on profits. Mr. Bernanke only can hope. He knows he can’t achieve victory alone.