Update 11/5/13: Sheila Bair (former FDIC Chairwoman) recently posted (October 31st, 2013) an article on CNNMoney/Fortune magazines website on Fannie Mae and Freddie Mac calling for abolishing Fannie Mae and Freddie Mac. This is a repost of a speech I gave in 2007, written originally for Federal Reserve Chairman Ben Bernanke, before the collapse of the economy in late 2008. Hopefully this offers a reappraisal of what exactly the situation was at that time:
Notes for consideration on Ben Bernanke Inflation speech
Good afternoon distinguished members of the faculty here at Harvard University, the student body, and various other participants. Today I’m here to talk about the U.S. economy and really the economic realities of the world in this new global age that we live in. Inflation has always been one of the key economic indicators for the direction in which the U.S. economy will go. It has been observed by the board that inflation, as we see it, has been historically low for the past five years relatively, as far as the CPI is concerned. This has pleased the board as well as the markets in the recent past as we have adjusted the interest rates of the federal reserve to meet not only the demands of a rigorous and prosperous U.S. market but also we have taken into account the opportunities which are present in the rest of the world economies. Relatively inflation has not seen better days, and consequently neither has my checking account (pause for hubris laden laughter). Nevertheless if you take into account the many, many variables which affect us all in our daily lives it becomes obvious that there needs to be a more sober tack taken to the situation. The fed for sees higher than average gas prices for the foreseeable future, much like the current situation. This is partially due to geo-political realities in the world, the level of supplies available, and also the fact that the gas companies are producing a certain octane for the season, among other things. The fed cannot and will not discount these factors when deciding which direction it wants to go in the future. The Bank of Korea and Bank of Japan are both meeting throughout this week and will come to a decision as to what it is that they want to do with their economies, in terms of fomenting growth for their respective states. And although no drastic changes have been forecasted from them, it’s still pertinent that we understand that these economies are very important to the stability of not only America, but also China, our largest trading partner. Recently it has come to light that there is some exuberance in the Chinese inflationary indexes as of late, which may affect the retail realities in not only the U.S., but in other important trade partners like Europe. What may transpire from such realities is any bodies guess. However these rumblings cannot be easily discounted by the fact that here in the United States our economy is too dependent to take such signs as a grain of salt.
As of this morning the European currency has hit an all time high against the U.S. dollar. There are those who feel that this may be a growing trend with the valuation of the U.S. markets as they relate to the rest of the world. Though these fears on a short term basis have some credence, we here at the Federal Reserve find that there is relatively little to be worried about for long term realized substantial gains. The Great Britain Pound is of more concern to us since its inception as the world’s hub for hedge funds due to its generous tax code. We for see added gains coming from the Asian markets, for the short term, will offset any added rise in the European monies after exchange valuation.
There has been talk for some time now as to the status of the sub-prime housing market in the U.S.. Key proponents of the idea of a bubble have advocated the position that perhaps there should be some sort of bailout for the sub-prime mortgage lenders, or maybe we should entertain the thought of a rate cut an order to perhaps subsidize the industry, possibly at the expense of the rest of the economy. In answer to the former the Federal Reserve has no legislative powers which would allow for us to do anything and so it is pointless for us to comment any further on the matter. However as for the latter, as far as the Federal Reserve is concerned, the forecast that the sector is headed for a collapse may very well bear fruit. However, it is important to keep in mind that much capital is still on the table, and there seems to be an underestimation as to the importance of this capital to offset some of the realized losses from this brew. On the whole the rest of the world’s economies seem to be fairly healthy and outperforming even some of the best forecast. There are those who would like to dismiss these Goldilocks years as simply a throwback to the times of the internet boom and bust of the 90’s, and early 21st century. I simply must disagree and have evidence to back up such claims. I turn to Columbia as a prime example. When only three years ago it was obvious that it had deteriorated into a veritable narco state, it has now become apparent that there are major strides being taken by not only the Columbian government but also the Columbian peoples as well. To back this claim up I point to the dramatic decrease in kidnappings, up to 80%, in murders, in excess of 80%, and the growth of the stock market, 3000% over the past 3 years. This is just one of the many successful stories emanating from emerging markets all over the world (applause). These gains are being realized not only for the ruling elite. You can see it in the streets and marketplaces, from the capital, to the country side; it’s very much so tangible not only for the day trader, but also the day time farmer. It’s not only the ruling elite who have benefited from this added security to the country, it’s palpable for all the citizens, and present for all to see (wait for applause).
The current legislative environment calls for a change to the tax code, particularly the way in which oil company subsidies are handled. The Federal Reserve must caution against such maneuvering. Any change in the economic environment at this point could have unintended and possible dire consequences for the inflationary environs of the future thenceforth.
The Federal Reserve welcomes the new president of the French government Nikolas Sarkozy’s overtures to reform the French economy. The Federal Reserve believes that with Mr. Sarkozy’s added inflationary soothers for the French economy there can be added benefits to not only the United States, but also the rest of the worlds markets (pause for applause). However the Federal Reserve must caution against Mr. Sarkozy’s attempts to shield his economy from the outside free market pressures which naturally enter into the French economy, as well as any open and competitive country. Which is why I say to him now, President Sarkozy if you wish to maintain the relative substantial growth which your country has seen throughout the 21st country you will allow the free markets along with good governance to rule the day, and not protectionist policies which are meant to isolate your country from the rest of the free market economies of the world. These policies simply are not tenable and I would hope that you sincerely reconsider on not only the French people’s behalf but also the rest of the world (pause for applause). Thank you very much and now I will open the floor up to any questions that the audience may have (applause).