–Such Long Duration Unemp “Has Never Happened in the Post-War Period

By Denny Gulino

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Wednesday
said the nation’s stubbornly prolonged unemployment is a “national
crisis” and the Fed is intent on hitting a 2% inflation “target.”

Answering questions of a Cleveland audience after a speech on the
path of progress of emerging economies, Bernanke said he understands the
difficulties posed for savers by low interest rates but that “ultimately
high interest rates and high returns and productivity require the
economy to be operating close to its potential.”

“Nobody’s really better off if the economy continues to be so weak,
with so many people out of work and with the opportunities for
investment and high returns to investment so limited.”

Faced with such a weak economy and even with the Fed’s
extraordinary attempted remedies, “Monetary policy is not a panacea,” he
repeats. Other parts of government could help a lot, beginning with
fiscal policy. There the issues of “long-run sustainability, long-run
budget balance” need to be addressed but with respect for “the issues
relating to the recovery which we’re experiencing now.”

At the same time “strong housing policies to help the housing
markets recovery would clearly be very useful and would allow the
monetary policy actions of the Fed — the low interest rates that we’ve
created, the low mortgage rates — to have more effect and to help the
economy more strongly,” he said.

Most of his answer, though, was devoted to the high rate of
unemployment and the large proportion of unemployed out of work a
long time. “The unemployment that we have, the jobs situation is really
a national crisis,” he said.

“We’ve had now close to 10% unemployment now for a number years
and of the people who are unemployed, about 45% have been unemployed
for six months or more. This is unheard of,” he said. “This has never
happened in the post-war period in the United States.”

Those unemployed for such long periods as six months “or a year or
two years, obviously they’re losing the skills they had, they’re losing
their connections, their attachment to the labor force,” he continued.

“Policies that could help them find work, training for work and
retain their skills and contribute to a productive society, I think
that’s an area that other parts of the government could contribute to
help the economy recovery,” Bernanke said.

Asked about the inflation signals from the TIPS spread over
Treasuries, which he said is useful but not perfect as a measure of
inflation expectations, Bernanke said they and other indicators point to
inflation expectations “broadly consistent with about 2% inflation which
is roughly where the Federal Reserve is trying to leave inflation.”

That “mandate consistent” rate is “consistent with price stability
but also promotes sufficient economy growth,” he said. “We’re going to
try to find inflation close to that 2% or so target.”

He continued, “If inflation itself falls too low or inflation
expectations fall too low that would be something we would have to
respond to. We do not want deflation.”

Falling prices “sounds great,” he said, “but when prices are
falling wages are also falling. So people really aren’t better off and
in fact, what we’ve seen is that deflation is really bad for the
economy,” a major source of collapse in the Great Depression.

Asked about the future of Fannie Mae and Freddie Mac, he said
“there’s pretty general agreement, that whatever reforms ultimately need
to take place — including privatization — that it probably needs to
take some time.” That’s because “the housing market and the U.S. economy
is still obviously in great stress, Fannie and Freddie have not yet
reformed themselves, there’s a great deal more to do. But ultimately
privatization is an objective that many people support.”

He offered one possibility for a future housing finance structure,
in which government “might be a last-in-line insurer of mortgages, say
the last 60%.”

“That would be meant to kick in during times of crisis like we’ve
had recently.” Under normal circumstances, though, “mortgage markets
would not involve any kind of government intervention” with a fee
absorbed by the housing industry such as the deposit insurance premium
paid by banks.

He emphasized the challenge of controlling health-care costs, half
of which are paid by government. “I think it’s going to be in many ways
a tougher world for health care professionals but a rewarding world
where we want to find ways to deliver quality health care to as many
people as possible but to do it in a way that doesn’t break the bank —
and that’s going to be the challenge going forward.”

** Market News International Washington Bureau: 202-371-2121 **

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