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Fedspeak translated

November 17, 2009 Leave a comment Go to comments

From Karl Denninger, a translation of Ben Bernake’s speech yesterday to the Economics Club of New York for those who do not speak Washington:

While I am on the topic of bank lending, I would like to add a few words about commercial real estate (CRE). Demand for commercial property has dropped as the economy has weakened, leading to significant declines in property values, increased vacancy rates, and falling rents. These poor fundamentals have caused a sharp deterioration in the credit quality of CRE loans on banks’ books and of the loans that back commercial mortgage-backed securities (CMBS). Pressures may be particularly acute at smaller regional and community banks that entered the crisis with high concentrations of CRE loans. In response, banks have been reducing their exposure to these loans quite rapidly in recent months. Meanwhile, the market for securitizations backed by these loans remains all but closed. With nearly $500 billion of CRE loans scheduled to mature annually over the next few years, the performance of this sector depends critically on the ability of borrowers to refinance many of those loans. Especially if CMBS financing remains unavailable, banks will face the tough decision of whether to roll over maturing debt or to foreclose.

TRANSLATION: We looked the other way and encouraged people to build commercial real estate that nobody really wanted or could pay for too, just like houses.  But unlike houses (we successfully dumped all that trash on you via Fannie and Freddie – and now the FHA!) we haven’t figured out how to make you, the taxpayer, eat this one yet.

We will though – trust us.

Recognizing the importance of this sector for the economic recovery, the Federal Reserve has extended the TALF programs for existing CMBS through March 2010 and newly structured CMBS through June. Moreover, the banking agencies recently encouraged banks to work with their creditworthy borrowers to restructure troubled CRE loans in a prudent manner, and reminded examiners that–absent other adverse factors–a loan should not be classified as impaired based solely on a decline in collateral value.5

TRANSLATION: Delay is important – we’ll dump it all on you as soon as you recover from the violation you took over the last two years on consumer lending and residential real estate.  Until then we’ve told the banks to lie about valuations.

In addition to constrained bank lending, a second area of great concern is the job market. Since December 2007, the U.S. economy has lost, on net, about 8 million private-sector jobs, and the unemployment rate has risen from less than 5 percent to more than 10 percent.6 Both the decline in jobs and the increase in the unemployment rate have been more severe than in any other recession since World War II.7

TRANSLATION: All this lying and scamming (which we countenanced and indeed practice ourselves) has led 8 million people to lose their jobs.

Don’t worry, it will get worse.  A lot worse.

Besides cutting jobs, many employers have reduced hours for the workers they have retained. For example, the number of part-time workers who report that they want a full-time job but cannot find one has more than doubled since the recession began, a much larger increase than in previous deep recessions. In addition, the average workweek for production and nonsupervisory workers has fallen to 33 hours, the lowest level in the postwar period. These data suggest that the excess supply of labor is even greater than indicated by the unemployment rate alone.

TRANSLATION: I told you it was going to get worse!  Didn’t you listen the first time?

With the job market so weak, businesses have been able to find or retain all the workers they need with minimal wage increases, or even with wage cuts. Indeed, standard measures of wages show significant slowing in wage gains over the past year. Together with the reduction in hours worked, slower wage growth has led to stagnation in labor income. Weak income growth, should it persist, will restrain household spending.

TRANSLATION: Work harder you slave, or you’ll get fired!  Oh, and spend every last penny – it’s important.  Especially if you don’t have it – go see Citibank – they’ll give you that 30% interest rate credit card.

I promise.

The best thing we can say about the labor market right now is that it may be getting worse more slowly. Declines in payroll employment over the past four months have averaged about 220,000 per month, compared with 560,000 per month over the first half of this year. The number of initial claims for unemployment insurance is well off its high of last spring, but claims still have not fallen to ranges consistent with rising employment.

TRANSLATION: We’re running out of people to fire.  I can’t fire my driver, for example.  That would require that I drive myself.  Ditto for my butler.

But I can feed him dog food – heh heh heh….

Although economic pain is widespread across industries and regions, different groups of workers have been affected differently. For example, the unemployment rate for men between the ages of 25 and 54 has risen from less than 4 percent in late 2007 to 10.3 percent in October–nearly double the rise in unemployment among adult women. This discrepancy likely reflects the high concentration of job losses in manufacturing, construction, and financial services, industries in which men make up the majority of workers. From the perspective of America’s economic future, the effect of the recession on young workers is particularly worrisome: The unemployment rate among people between the ages of 16 and 24 has risen to 19 percent–and among African American youths, it is now about 30 percent. When young people are shut out of the job market, they lose valuable opportunities to gain work experience and on-the-job training, potentially reducing their future wages and employment opportunities.8

TRANSLATION: The young are both stupid and weak.  We know they won’t revolt – they have had a dozen years of government indoctrination and just finished up the mandatory part.  (Thank God this isn’t France or those youngsters would have gotten the guillotine out from storage by now!)

Given this weakness in the labor market, a natural question is whether we might be in for a so-called jobless recovery, in which output is growing but employment fails to increase.

TRANSLATION: This is not a question.  The question is whether you will notice that we conspire with the government to simply lie about “output”.  Witness the so-called “retail sales report” this morning, which we successfully cooked.  (As an aside that bastard Tickerguy caught us, but nobody reads him anyway.  Fortunately.)

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