Bernanke Sees Progress on Economic Recovery

Reasons for cheer on the economy? While Chairman Bernanke speaks more often theses days then we might see in growth times, the markets were up on Friday after his speech at the Federal Reserve Bank of Kansas City's Annual Economic Symposium, Jackson Hole, Wyoming (text of speech). Bernanke reported both on the toll of the economic crisis and the gains made since. Bernanke clearly credits government intervention worldwide for easing the panic that hit the markets last October. Bernanke does believe that the world is "beginning to emerge" from the financial crisis, though he does not specify how long recovery might take. Bernanke does believe, however, that positive growth will return in the "near term." Just a bit of positive flavor seems to be enough to help the markets these days.

Is this just Bernanke or is there something more? Unemployment claims are still high with most states seeing their jobless claims rising last month (see Jobless Claims Post Increase). And, the deficit over the next ten years is expected to be 2 trillion more than expected (see Deficit Expected to Widen). While none of this is positive, the numbers for sales of existing homes was up 7.2% from June (see Housing Lifts Recovery Hopes). Despite the mixed news, the housing market has played a big role in the financial crisis, so good news in that sector is important. Just simply that buyers are back purchasing homes.

No matter how mixed or hopeful an assessment of the current economic state we might cast, we might heed Bernanke's warning (one he has given already):

"Looking forward, we must urgently address structural weaknesses in the financial system, in particular in the regulatory framework, to ensure that the enormous costs of the past two years will not be borne again."

The temptation to fight the current economic crisis through government programs like Cash for Clunkers and home buyer tax credits should not give way to a failure to address the problems that led us to the crisis. Not surprisingly, we seem to be spending much time on cure right now. What about prevention of future problems (See Is Financial Regulation Overhaul Stumbling? and Doubts Slow Financial Regulation Overhaul)? The coming months will tell whether the politicians can come to some arrangements for overhauling financial regulation. It is easy to have doubts when we are contemplating curtailing the authority of some governmental agencies (Office of Thrift Supervision)and enhancing others (Federal Reserve). Will a stronger Federal Reserve be the best vehicle to protect consumer rights, for instance? I have my doubts about how this will resolve.

Financial regulation changes may ultimately appear less comprehensive and more piecemeal. There is language floating currently to tackle the derivatives that went unregulated (see New Milestone). The Supreme Court is going to hear a case on executive pay. What's in this for consumers? One of the controversial cornerstones to the overhaul is the creation of a Consumer Financial Protection Agency. President Obama's argument that protections are needed as part of a financial overhaul package are persuasive, as consumers clearly played a role in the crisis.

Over the coming months we will see more pieces to the financial regulation puzzle. I would like to see some changes in consumer rights. The current framework makes it difficult for initiatives to move forward as it may require action of several federal agencies (see How your $4 Cup of Coffee Can Cost You $35 or More). To the extent we want to blame consumers for their role in the real estate and credit crisis in particular, it is easy to argue that transparency in financial services dealings with consumers would be enhanced with a single watchdog agency.

-JSM