Tuesday, February 26, 2008

The Ben Bernanke Show

Brian Wingfield (Forbes)

Federal Reserve Chairman Ben Bernanke spends so much time testifying before Congress these days, it might seem he barely has time for his day job as the central bank's top regulator. Wednesday, Bernanke heads back to Capitol Hill, where he'll give his mandatory, semi-annual report on monetary policy to the House Financial Services Committee. He'll repeat those remarks to the Senate Banking Committee on Thursday. They'll be the 12th and 13th times he's faced Congressional panels since January 2007. In all probability, he'll parrot much of what he has said in the three appearances he's made on the Hill since September: The economy is growing more slowly than usual, it will rebound later this year, recession isn't likely, more rate cuts are possible, inflation remains a concern, etc., etc. Tedious? Absolutely. But lawmakers can't seem to get enough of Bernanke. So far this year, he's appeared before the Senate Banking Committee and the House Budget Committee for routine oversight hearings. Committee chairmen are well aware that Bernanke is a big draw, especially in an election year, when the economy is ailing. Of course, every time he's speaks publicly, he might hint at a further rate cut. Rep. Paul Ryan, Wisc., the top Republican on the House Budget Committee, says that when a Fed chairman testifies before his committee in early January, he is simply trying to get a better understanding of how the Fed is deriving its monetary policy decisions. Allan Meltzer, a professor of political economy at Carnegie Mellon University who has written a history of the Federal Reserve, says it doesn't necessarily sully Bernanke's reputation to repeat the same mantra every time he visits the Hill. "What will hurt him is the fact that he's not saying things like 'I have to watch both inflation and the unemployment rate,'" he adds. And surprising as it may seem, Bernanke actually appears before Congress less than his predecessor Alan Greenspan did. Not counting his re-nomination hearings, Greenspan testified an average of more than 10 times per year between 2000 and 2005. In 2005, his last year at the central bank's helm, Greenspan saw a Congressional panel 12 times. The year before that, he was there 11 times. Bernanke, by contrast, appeared before lawmakers 9 times in 2007 and 6 times in 2006.

The figures for both men include the Fed chairman's semi-annual reports to Congress, which account for four separate hearings each year (two each for the House and Senate). In addition to the House Financial Services and Senate Banking Committees, where the semi-annual remarks are delivered, Fed chairmen often face the Joint Economic Committee and the budget panels of both chambers. Every one of Bernanke's appearances before Congress has focused on the general economic outlook, the subprime mortgage mess or fiscal challenges for the United States--often a combination the three issues. No surprise there, given the state of the economy in recent months. Congress summoned Greenspan for his wisdom on a range of topics outside the overall health of the U.S. economy. Examples: China's exchange-rate policy (June 2005), education (March 2004), the nation's natural-gas supply (twice--in June 2003 and again the next month), the aging global population (also 2003), U.S. trade policy (April 2001) and commodity futures trading (June 2000). "What Greenspan did was somewhat on the unusual side," says Meltzer. "He had a view and he wanted it to be heard." Bernanke, on the other hand, has deliberately stayed relatively far from the policy debate.

Markets generally don’t like the Fed chairman’s remarks. On the dates coinciding with Bernanke’s four most recent appearances before Congressional panels, the Dow Jones industrial average closed slightly down. The most severe example was on Jan. 17, 2008, when it closed at 12,159.21 from an opening of 12,467.05--a 2.5% slide. During his semi-annual testimony on July 19, 2007, the Dow closed just half a percentage point higher. The day before, down 0.2%. The Wall Street barometer treated Greenspan in much the same way. On the day of his final testimony as Fed chairman, the market closed up 0.5%. During his last semi-annual address, it ended the first day of testimony up 0.6%, the second day down 0.5%. But a month earlier, when Greenspan addressed the Senate Finance Committee on China’s exchange rate, the Dow dropped 1.6%, from 10,587.09 at the start of the day to a close of 10,421.44. Nonetheless, markets and policymakers will be paying close attention to what he says this week. During his semi-annual report last July, Bernanke made this pronouncement: "Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend."

"Moderate" growth isn't exactly what happened. The economy grew at a 4.9% rate during the third quarter of 2007 before dropping sharply to 0.6% growth for the final three months of the year. Amid a deluge of economic data to be released this week are revised figures for growth in the fourth quarter, due out Thursday. If the update is worse than the previous estimate and the economy continues to falter, expect the Ben Bernanke Show to become a running feature this year on Capitol Hill.

Ahead of the Bell: Senate's Mortgage Fix


The Senate could begin debating Tuesday another round of remedies for homeowners caught in the worsening housing crisis. Senators may vote this week on a package of legislative proposals, designed by Democrats, that includes easing bankruptcy rules and boosting funds for foreclosure-prevention counseling. The proposed revision to the U.S. bankruptcy code would allow judges to cut interest rates and reduce what's owed on troubled borrowers' mortgages. At stake are potentially millions of dollars of profits for mortgage lenders, which have been lobbying against the measure. Their opposition is echoed by many Republican lawmakers. Consumer advocates, meanwhile, are pushing senators to approve the change. Currently, lenders can foreclose against a homeowner in default on a primary residence 90 days after a bankruptcy filing, and judges have no authority to order changes in mortgage terms.

The Mortgage Bankers Association has said the proposal would hurt more borrowers in the long run by requiring "higher interest rates and larger down payments to offset the risk" of bankruptcy court intervention for some homeowners. The measure is expected to face tougher resistance than the recently approved economic stimulus package, which narrowly touched on the mortgage crisis. Democratic backers consider the new legislation a way to make up for shortcomings in the Bush administration plan to freeze interest rates on a relatively small percentage of loans made to high-risk borrowers.

Monday brought more evidence of the housing sector's ills. The National Association of Realtors reported that sales of existing homes fell to the lowest level in nearly a decade in January while the median price for a home dropped for the fifth straight month. "Today's dismal housing news reinforces the need for congressional Republicans to join Democrats to address the bulls-eye of our economic troubles by passing a housing recovery package this week," said Sen. Charles Schumer, D-N.Y. "The housing crisis has mushroomed in part due to Washington's inaction, and declining home values cut to the very heart of families' sense of financial security and our economy's overall health." Also included in the Senate package is a measure mandating $200 million for foreclosure-prevention counseling services -- a near doubling of funds already committed by Congress -- and an allowance for states to issue more tax-exempt bonds so that housing agencies could help homeowners refinance high-cost mortgages.