Welcome, everyone, to a special edition of "market makers." ben bernanke begins testify moments from now.
This is the semiannual report to congress on his monitor policy.
I am erik schatzker, good morning to you.
I am sarah eisen.
Looking forward to the chairman's testimony.
He has been clear saying quantitative easing does not have a preset chords.
We see a sharp reduction in markets, particularly in bonds.
By no means is this a done deal, in terms of taking away quantitative easing.
Given the speculation that has surrounded the pace of bond buying, an extremely important testimony by bernanke.
The question and answer session with members of congress will be important as well.
We are watching the market reaction.
Bonds are declining, people interpreting the remarks.
He makes it clear is a case by case report when it comes to the economy and scorecard.
It depends on whether the economy turned for the better or worse.
Hopefully, you can expect questioning on how he thinks the economic recovery is, how solid is, especially after housing starts this morning.
He is our focus, but we also have another great guest coming up.
Carson block, founder of muddy waters research, an interview with the short seller.
He would prefer to be called a researcher.
He made a name for himself going after reverse-lifted chinese stocks trading in america.
You remember sino-forest.
He ended up calling it a fraud and ended up costing john paulson hundreds of millions of dollars.
Carson block, founder of muddy waters research, making news with his first ever short selling on an american company.
It is american tower.
He says the stock may fall as much as 40%. it is already on its way down.
It is trading down about $2 right now, the equivalent of 3.5%. that is an exclusive interview coming up at around 11:30 this morning.
We wait for the fed chairman to start taking questions.
Let's go to peter cook to tell us more about ben bernanke's prepared remarks and what we might expect from members of congress.
The takeaways so far, perhaps a slightly more dovish bernanke.
He will stress at a highly accommodative monetary policy is likely to continue for the foreseeable future.
He will stress again tapering of those bond buys could begin by the end of the year.
Perhaps end altogether by the end of september.
It all depends on the outlook.
He will say specifically, i emphasize, because asset purchases depend on economic conditions, there is no preset course.
He goes on -- the message he is sending to markets.
At the same time, talking about a change with respect here reinvestment, morgan back securities and treasuries.
Prepared to reinvest the proceeds.
That is stronger language than we heard.
Also saying tapering not equated to tightening.
In the economy is growing at a moderate pace, the labor market not satisfied with the unemployment rate.
He is worried about risk factors, as well as the debt ceiling fight to come.
. you are there at a news conference.
This is completely different.
He is talking to members of the house financial services committee.
They have politics to keep in mind.
Just how tough will question the be?
He will likely get tougher question today than to march in front of the senate.
The house financial-services committee, the head of that committee is a well-known critic of the fed.
This is a more dovish ben bernanke today.
He will hear it today that this is not the right approach for him to be taking.
Remember also there are democrats who might be urging the fed to do even more to bolster the economy.
Also remember this could be the last time he delivers this semiannual testimony in front of this particular committee, if, indeed, he is done as chairman at the end of the term.
Peter cook, we will check in with you later.
While we wait for the fed chairman and members of the house financial-services committee, we will talk about the kind of questioning he is likely to face.
With me in new york is a managing director of bnp paribas.
Michael mckee is also with us.
They will be with us all morning as we follow the chairman's testimony.
Tim, you have seen the prepared testimony.
We are likely to hear something close to that when he speaks.
Is the market interpreted those remarks the right way?
Without a doubt.
What we see is the chairman pulling back on some of his comments in may and at the june fomc.
The comments are dovish.
To it knowledge the risk of deflation, particularly, as peter said, to formally reintroduced the concept of maturing bond proceeds.
The fed will have quite the balance sheet for quite some time.
You said may be nothing new, but clearer language.
He had a chance to clarify.
A chance to set the market street.
It is a communication problem they have had.
The 2-year is now below where it was on june 19, after the fed conference.
He has basically made his point.
What bernanke has tried to do is get everyone to separate the idea of raising interest rates away from the idea of tapering.
To what degree is ben bernanke speaking for the fed?
He is the most important policy maker, but there are differing views to a large degree between people like jim bullard, charles plosser her.
Can we interpret everything that bernanke says as a reflection of the majority view it at the table of the fomc?
Today he is speaking on behalf of the fomc, so yes.
There are differences of opinion, but he is reflecting a consensus.
A lot of these people are not necessarily ready to go as far as some of the more dovish members of the committee.
I said earlier, this is like tippling it and the old column -- kipling and the old poem "if." he is trying to make it conditional.
Did he use the word efficacy?
That is my favorite word.
I am sure they will ask him about whether or not that is working.
That is what mohamed el- erian said, there is nothing really about the risk-reward ballot.
You talk to investors around the world because of your position it had bnp paribas.
How is this affecting markets are run the world?
When you talk to international bankers, the effect they would be feeling would be on sovereign debt spreads, emerging market spreads, dramatic repressing in those assets causes.
That is near and dear to their hearts.
Things have been much more contained in the u.s. there is concern internationally about what this could do to the ability of places like south africa, brazil, india, to raise capital in the open markets.
You see the bank of england and ecb pushing back against this with their ford guidance.
Bond yields rising in the periphery in europe.
We will have much to talk about with michael mckee and the directing editor @ bnp paribas up.
You are looking at live pictures from the house financial services committee.
You are looking at maxine waters from california giving her opening remarks.
Bernanke will be speaking a few moments from now.
They are having some audio difficulties in the room in washington.
Sounds like they may have fixed it.
That is maxine waters making her opening remarks.
There was a brief delay but it looks like we are back on.
Let's continue to talk before bernanke begins speaking.
We have a guest from bnp paribas as well as michael mckee.
You and tim were making remarks about the way that bernanke is received externally.
How about from within the financial markets?
There is quite a bit of confidence.
Since 2008, he since 2008, he has led the u.s. through a very tumultuous period.
The question for him today will be what is his tone when he speaks?
Particularly at the june fomc meeting, he seemed a little distant, distracted.
I am curious to see -- what was that our court reference he made about landing a ship on an aircraft carrier?
I think if he can reinforce his dovish comments, that would be good for the markets.
Another question that may come up, where will you be working in february?
All indications are that he will be gone.
Which would make this his last testimony in congress.
We should have them walk into the room with a theme song, as we saw rivera come out last night in the baseball game.
Janet yellen would bring in confidence, coming from the outside.
In theory, they will be starting this tapering, moving towards monetary tightening.
Would janet yellen have as much credibility?
Communication has been a hallmark of this federal reserve.
Do we know janet yellen's communication style?
Within the fed, she is well respected, considered a top economist.
She is well known within those circles.
As far as having a grand stage, she has not have that yet.
That does not mean that you cannot live up to the challenge.
How about the fed's ability to read markets?
That has been a question since we heard about the possibility of tapering.
Yields have fallen back since then, and bernanke has walk them back from where there were a few weeks ago.
I sat across the table of the fed quite a bit in my career.
Without a doubt, these are the smartest people in the room.
Their ability to predict price action, we can question that.
That is why you saw so much push back from governors, including someone like fisher, after the june fomc.
A lot of people say the fed would be much better off if they just shut up, that there is too much transparency.
From a market perspective, would that be better?
It depends on the initial communication.
It is worrisome to me to have so many people from the fed respond, staring at their bloomberg screens, 24 hours after that press conference.
Essentially, they were watching these screens and got were read.
The fact that the fed is so worried about our to action -- our to our actions in the marketplace, they felt the need to respond to that.
That tells me it will be harder for them to pull away from qe as time goes on.
That is a concern that the fed official tell me they have, that they are getting dragged into this market function reaction.
They are supposed to be more focused on the medium-term, but it is harder as each individual person can do their own thing.
And their medium-term and long-term are so different from investors.
For investors is six to 12 months.
The fed's long-term is measured in years.
That is where you get conflict.
If the fed thinks there will be tapering, the market will price to that turning point.
Which raises the question, what is the fed so afraid of?
Is it the speed at which yields are moving?
In theory, the fed should want the market to anticipate its next moves.
That is supposed to be a good thing.
The fed's completes a financial asset prices.
If they were to start tapering, those prices would naturally have to fall to the level of the economy.
That is what they are afraid of the doubt they have a problem with volatility, too.
We have traded at these prices before but extreme volatility makes investors nervous.
The last thing the fed wants to do is to add volatility to the marketplace.
They want to attract confidence and investors.
It is a fruitful discussion that we will continue as we await for ben bernanke.
In the meantime, let's get to the news feed.
Company news from around the world.
First quarter profit tripling at alibaba.com.
The company has expanded lending, secured financing come and is preparing for a possible ipo.
And as a leader edward snowden maybe with a walk out of the moscow airport in a few days.
Russia will be deciding on his request for asylum within a week.
The government has says that he could have asylum if he keeps -- stops revealing american secrets.
The wholesale price of gasoline has reached a new high.
Three refineries that supply the east coast have units that are either closed or cannot produce as much.
We are awaiting testimony from ben bernanke.
That will be taking place in washington any minute.
That is carolyn maloney making her remarks.
We are back.
We are monitoring washington, d.c. where ben bernanke is about to take questions from the house financial-services committee.
Right now, mel watts, who has been nominated to lead the federal housing finance agency, potentially asking some questions on housing.
We have a managing director of bnp paribas with us.
Former assistant treasury secretary.
Michael mckee is here as well.
We will have continuing coverage here on bloomberg television about the chairman.
Housing is an important topic that i will be eager to hear from ben bernanke.
A good thing he was not citing today's housing numbers.
Very volatile, basically declined in multifamily housing.
If you look at the level of single-family housing, about the same level they have been.
One of the points that you both brought up while we were in commercial break is that there is some further news in his testimony about the way the fed will balance -- manage their balance sheet.
He said that they would maintain their mortgage bonds and not sell them.
Today he as treasuries to that.
Significant for treasury players.
That is why you see an improvement in 10-year prices today.
When market participants look at the yield curve, they look at zero to five years, depending on the fed fund rate.
Longer-term securities are more focused on qe.
The chairman made it clear that q e will be her longer than maybe the market expected.
Ben bernanke's microphone is not working.
We will be waiting, once again, for the audio problems.
Is this because of sequestration, but it cuts?
-- budget cuts?
While we are waiting, you said the way that the fed would be managing the balance sheet, helping to keep yield down, bring them down, today, is that because people are looking people are looking out into the future because treasury supplies will be locked up for the foreseeable future?
That is what he said today.
I think that was a question mark about the market had.
Tim bitsberger will stay with us.
Michael mckee is also with us.
We are waiting for chairman bernanke to begin speaking and taking questions from the house financial-services committee.
We have a cover for you all morning long.
This is a live shot.
We also have an interview with carson block, founder of muddy waters research.
He is going short on american co.
For the first time.
As you would expect, trading down this morning.
They have finally gone and ben bernanke's microphone working.
His testimony is starting right now.
Housing prices seem likely to recover notwithstanding the recent increases in mortgage rates but will be important to monitor developments in the sector carefully.
Conditions in the labor market are improving gradually.
Unemployment stood at 7.6% in june, about a half percentage point lower than in the months before the federal open market committee initiated its asset purchase program in september.
Non-farm payroll employment has increased by an average of 200,000 jobs a month so far this year.
Despite these gains, the job situation is far from satisfactory.
As the unemployment rate well -- remained well above its long- term level and long-term unemployment are still much too high.
Meanwhile, consumer price inflation has been running below the committee's lawyer one objective of 2%. the price index for personal consumption rose only 1% over the year ending in may.
This of this reflects in part factors likely to be transitory.
Moreover, measures the longer- term inflation expectations have generally remained stable which would help move inflation back up to two%. however, the committee is aware low inflation poses risks to economic performance.
For example, by raising the real cost of capital investment, which increases the risk of outright deflation.
Consequently, we will monitor the situation closely as well and will act as needed to ensure inflation moves back toward their 2% objective over time.
At the june fomc meeting, my colleagues and i predicted economic growth would pick up in coming quarters, resulting in gradual progress towards a level of unemployment and inflation consistent with the federal reserve's half statutory mandate to foster maximum employment and price stability.
Specifically, most participants are real gdp growth beginning to step up in the second half of the year, eventually reaching a peace between 2.9% and 3.6% in 2015. they predicted the on the planet rate to rise -- decline between 5.6 and 2.8% and saw inflation gradually increasing towards the committees to% objectives.
The pickup in economic growth predicted by most participants reflecting their view that federal fiscal policy will exert some of last track overtime as the effects of the tax increases and spending sequestration diminish.
The committee also believe risks to the economy have diminished since the fall, reflecting some easing of financial stresses in europe, the gains in housing and labor markets i mentioned earlier, and better budgetary conditions of state and local governments, and struck her household and business balance sheets.
That said, the risk remains tight tesco policy that strains economic growth over the next few quarters by more than the current expect or the debate concerning other fiscal policy issues such as the status of the debt ceiling, will evolve in a way that will hamper recovery.
Generally, with the recovery proceeding at a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility the global economic growth could be slower than currently anticipated.
With unemployment still high and decline only gradually and with inflation running below the committee's long run objectives, and how the accommodative monetary policy will remain a corporate for the foreseeable future.
In normal circumstances, the committee's basic tool for providing monetary accommodation is its target for the federal funds rate.
However, the target has been close to 04 -- since 2008 in cannot be meaningfully reduced further.
Instead, we are providing policy tools.
The first tool is expanding the portfolio of longer-term treasury securities and agency mortgage-backed securities.
We are currently purchasing $40 billion a month in agency mbs, and $45 billion in treasuries.
The second is for guidance about setting the federal funds target over the medium term.
Within our overall policy framework, we think of these tools as having somewhat different roles.
We are using asset purchases and a resulting expansion of the balance sheet, primarily to increase the near-term momentum of the economy with the specific goal of achieving improvement in the outlook of the labor market in the context to price stability.
We have made progress toward fiscal and with inflation subdues the intend to continue purchases until substantial improvement in the liver market outlook has been realized.
In addition, even after purchases and, the federal reserve will be holding its stock of securities and treasuries off the market and reinvesting into mature securities, which will put downward pressure on long-term interest rates, support mortgage markets, and have to make financial conditions more accommodative.
We are relying on nears zero short-term interest rates together with our short-term guidance that rates will continue to be low.
This is our second tool.
To maintain a high degree of the commendation after asset purchases and, even as the economic recovery strengthens and unemployment declined to more rigid more normal levels.
In combination, this can provide the high level of accommodation it to promote a strong economic recovery with price stability.
In the interest of transparency, committee participants agreed that it would be helpful to lay out more details regarding the thinking of the asset purchase program, specifically to provide the permission of our assessment of progress to date as well as the likely to victory of the program if the economy evolves as projected.
This agreement provides additional information did not reflect a change in policy.
The committee's decisions regarding the asset purchase program and the overall stance of monetary policy depends on our assessment of the economic outlook and of the cumulative process toward objectives.
Of course, economic forecasts must be revised as new information arrives and are thus necessarily provisional.
The economic outcomes the committee participants sought as most likely in their june projections involve continuing gains in labor markets, supported by moderate growth picking up over the next several quarters as restrain from fiscal policy diminishes.
Committee participants also saw inflation moving back towards our 2% objective over time.
If the incoming data or to be broadly consistent with projections, we anticipated it would be inappropriate to begin to moderate the monthly pace of purchases this year.
If the subsequent data continues to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases and missteps to the first half of next year, ending around midyear.
At that point, if the economy has evolved along the line we anticipate, the recovery would have gained further momentum, unemployment would be in the vicinity of 7%, and inflation would be moving towards our 2% objective.
Outcome would be fully consistent with the goals of the program be established in september.
I emphasize that because our asset purchases depend on economic and financial developments, they are no means on a preset course.
On the one hand, the economic conditions improve faster than expected and inflation rises decisively back towards our objective, the pace of asset purchases could be reduced somewhat more quickly.
On the other hand, if the outlook for employment were to become less favorable, if inflation did not appear to move back -- to be moving back to 2%, or financial conditions were good to be insufficient accommodative to maintain our objectives, the current pace of purchases could be maintained for logger.
Indeed, we would be prepared to deploy all of its tools, including an increase in the pace of purchases for a time to promote a return of maximum employment in the context to price stability.
As i noted, the second to a committee is using to support the recovery is former guidance regarding the path of the federal funds rate.
The committee has said it intends to maintain a high degree of monetary accommodation for a considerable time after the asset purchase program ends and economic recovery strengthens.
In particular, the committee anticipates its current exceptionally low target range for the federal funds rate will be appropriate at least as long as the on the plant remains above 6.5% and inflation and inflation expectations remain well-behaved in the sense described in the fomc statement.
As i observed on several occasions, the phrase at least as long as is a key component of the great guidance.
These words indicate the numbers for unemployment and inflation are threshold, not triggers.
Reaching one would not automatically result in an increase in the federal funds rate target.
Rather, it will be the committee to the citic -- consider whether the outlook for the market and our economy justify an increase.
For example, if a substantial of measures in on the planet were judged to be cyclical, rather than gains in employment, the committee would be unlikely to see that as a sufficient reason to raise its rates.
Likewise, the committee would be unlikely to raise rates if inflation remained consistently below are longer run objective.
So long as the economy remains short of maximum employment, inflation remains our lager run objective, and inflation expectations remain well- anchored, increases for the federal funds rate was the begin are likely to be gradual.
I will finish by providing you with an update on progress to the forms to reducing systemic risk in the nation's largest firms.
As was discussed last week, the federal reserve and other banking agencies have adopted final rules earlier in the month to implement the basel iii capitol records.
This will increase the quality and quantity of a good toward capital by establishing a new minimum capital 0 ratio and implementing a capital conservation buffer.
The rule also contains a supplementary leverage ratio which applies only to large and internationally active banking organizations, consistent with their systemic importance.
In addition, the fed will also apply firm charges on the greatest systemic risks that exist.
The federal reserve is considering further measures to strengthen the capital positions of large internationally active banks, including the proposed rule issued last week that would increase the required leverage ratios of such firms.
The fed is also working to finalize the in and provincial standards set out in sections 155 and 166 of the dodd-frank act.
Rosalie to stress testing n resolution planning are in place and we have been actively engaged in stress tests and review the first wave resolution plans.
In coordination with other agencies, we have made progress on the key issues relating to the volcker rule and they're hoping to completed by year's end.
Finally, the federal reserve is prepared to regulate and supervise systemically important on patronage of firms.
Last week, the financial oversight stability council nominates two firms.
It has proposed a designation of a third which requires a hearing.
We are developing a regulatory framework that can be tailored to each firm's business mix, risk profile, and footprint, consistent with legal requirements under the dodd- frank act.
I would be pleased to take questions.
The chair will recognize himself for five minutes for questions.
The first question is in some respects the most obvious.
You are aware better than most that as you testify before the joint economic committee on may 20 to come as the wall street journal reports, the stock market moved up on your testimony.
He began taking questions and the markets turned negative when dom minutes were released.
On june 19, at the hint of tapering, the dow jones dropped almost 600 points in two days.
Recently, your comments on july 10 saw the s&p hit record highs.
A couple of questions result from this.
Well, a couple of quotes.
Warren buffett has described our stock market as waiting on a hair trigger from the fed.
Richard fisher describes stock markets as "" on the drug." of easy money.
You have described your threshold as providing guidance to the markets but you have also qualified that the threshold provide guidance as to when or how the policy will change once those thresholds have been reached.
Recent survey of 55 economists by the wall street journal gives the fed a d- for its guidance.
Could you comment on your guidance, could you comment on mr.
Buffett's and president fisher's comments?
We're in a difficult environment, economically, financially, and we are dealing with unprecedented monterey policy developments.
I continue to believe we should do everything we can to surprise the markets and public about our plans and how we expect to move forward with monetary policy.
Not speaking about these issues would have risked a dislocation, moving of market expectations away from expectations of the committee.
It would have risked increased build up of leverage or excessively risky positions in the market, which i believe the unwinding is part of the reason for the volatility we have seen.
It has been important that we have been indicated best we can what our plans and thinking is.
I think the markets are beginning to understand our message, and i think the volatility has moderated.
I hope you are right.
Let me change subjects.
This committee tomorrow will have a hearing on a bill designed to reform fannie and freddie, the fha, critical housing policy in america.
The fed released a study that estimated fannie and freddie has a seven-basis point subsidy in their interest rate.
Does the fed still stand by that study?
It was a good study, yes.
You have been quoted in the past, with respect to the gse's, stating, privatization causes several problems with the current gse model.
It would eliminate conflict between private shareholders and public policy and would likely diminish systemic risk as well.
Do you still stand by that statement?
I stand by the view that the gse's, as constituted before the crisis, had serious flaws, in terms of the employes a guarantee from the government not compensated, a lack of capital, and the fact they were torn between public and private purposes.
I agree there were a significant problem.
[inaudible] gse-type organizations are not successful to mortgage financing.
Many other industrial come -- countries have achieved ownership rates comparable to that of the united states.
One device that has been widely used was covered bonds.
Do you still stand by that statement?
As i understand it, you view it as a viable to retain a government backstop in times of great turmoil, as we saw in 2008. is this correct?
The fed has not put forward a plan.
Several economists -- that would be independent research that is not endorsed by the governors.
Regrettably, i see that my time has come to an end.
The chair now rent -- recognizes the ranking member for five minutes.
Thank you, mr.
We are interested in the survey that was done by the imf, where they reported the u.s. could have growth by adopting a more balanced and gradual pace of fiscal consolidation, especially in a time when monetary policy has limited room to support the recovery further, specifically, the imf recommended that congress repeal the sequester, raise the debt ceiling to avoid any severe shock, and adopted comprehensive measures to restore long run fiscal sustainability.
Would you agree with the imf, that the policies currently in place have significantly depressed growth in the united states, and to what extent can monetary policy offset the adverse consequences of the current fiscal policy?
As i have said many times, fiscal policy is focusing a bit too much on the short run, not enough on the long run.
The near term policies which include the sequester and tax increases and other measures, according to the cbo, cutting a percentage point and a half.
1.5% from growth in 2013. at the same time, congress has not addressed a lot of long run issues where sustainability remains not yet achieved.
So, yes, my suggestion to congress is to consider possibilities that involve somewhat less restraint in the near term, and more action to make sure we are on a sustainable path in the long run.
I think that is broadly consistent with the imf's perspective.
I would like to ask you a question about housing finance.
Fed chairman, you mentioned, we would be hearing bills, and among other things, winding down the gse's and ending the government guarantees, while also reducing the government footprint in the housing market.
I am concerned such a drastic reduction could affect home owners, the economy, and eliminate the 30-year fixed-rate mortgage as we know it.
How might ending the 30-year fixed-rate mortgage affect access to affordable mortgage credit, the housing market generally, and the fed's need to continue its extraordinary support of the housing market through quantitative easing?
It is very important that average people in america have access to mortgage credit that allows them to buy a home, if that is what their financial situation and needs require.
As long as the product is consumer friendly, save, protected in that respect , and is financially reportable, i do not think it necessarily has to be in a form.
Many people use different types of mortgage structures.
I think the main thing again it is not the instrument itself, but rather, access of the average american to home ownership and mortgage credit.
To what extent is the structure of the country's housing finance system a prime contributor to economic volatility?
Do you agree that housing finance systems and variable- rate mortgages are the dominant product to a leading to burst and bubbles in the housing market?
I have not seen evidence to that.
In the united states, adjustable-rate mortgages, unfortunately, were sold to people who were not able to manage the higher payments when they rose, and they were not very well disclosed.
There are other countries that have adjustable-rate mortgages or they have not have quite the same problems.
One small advantage is that when the central bank changes interest rates, it shows up immediately in the cost of housing, and maybe more powerful in that respect.
I've been the most important issue is disclosure and underwriting, making sure people can't afford the cost of the mortgage, even when the payments go up.
Thank you very much.
I appreciate your comments about the various structures.
I suppose your comments about variable-rate mortgages probably consists of concerns we have about no-documentation loans and other kinds of things, where we cannot guarantee those people take out the mortgages are able to repay them.
Was there a question?
The chair now recognizes the gentleman for five minutes.
Thank you, mr.
I want to quickly cover three areas.
One, interest rates, two, too big to fail, and three, talk about the taylor rule.
I would be reticent if i did not pass along a question one of my friends had.
Should he refinance right now?
That is probably a question that a lot of people had.
I know i did not long ago.
You can answer if you would like.
I am not a qualified financial adviser.
That might be part of the problem with dodd-frank.
If you do not qualify, nobody qualifies.
I think there is that fear out there with the increase in market interest rates.
A lot of us coming out of a real-estate background, we said, maybe we should have been watching with your comments would be.
What i am really concerned about is -- and this is at risk to myself of not having a very warm welcome next time i am in new york city visiting some of my friends -- but i am concerned wall street is too dependent on the fed and the signals you are having, while main street is really getting buffeted about, whether is interest rates, tax policy, certainly regulatory policy as well.
We need to make sure that we are moving beyond that.
Maybe the market just took an uptick based on my comments -- you are watching questioning happening live in the house financial-services committee as members pose questions to ben bernanke.
Ben bernanke even cracking a joke, i am not a certified financial adviser.
Basically, the message is clear on the markets.
The volatility is starting to come down since the last time i put out that tapering idea.
We're looking at the 10-year treasury yield at 2.48. we are approaching the end of the hour, so it is time to check on the markets.
When it comes to ben bernanke, you have to watch the bond market.
We have a rally in treasuries with yields lower.
Just below 2.50. it is off the bottom of the session, but still lower.
It hit 2.56 before the testimony became available this morning.
People were anticipating perhaps something different.
Let's remind everybody, it is not just ben bernanke testifying, the fed does not have a preset target for one quantitative easing will end or be tapered off, but also that the fed plans to maintain some treasury inventory on its balance sheet, taking the available supply out of the market.
This morning, an exclusive right here on "market makers," carson block, founder of muddy waters research.
He made himself famous with his short call on sino-forest.
He has now issued his first recommendation on an american company, american power -- tower, a reit that operates cell phone towers.
He will be here for an exclusive.
I am watching shares right now.
Trading a bit lower.
Not the precipitous drop.
Perhaps when he comes to explain his case, you never know what will happen.
We are back in two minutes.
. . from bloomberg world headquarters in new york, this is "market makers" with erik schatzker and stephanie ruhle.
Good morning once again.
You're watching "market makers ." i'm erik schatzker.
I'm sara eisen, in for stephanie ruhle.
Ben bernanke is taking questions from oh representative william lacy clay, democrat from missouri.
Is there a casual or correlated relationship between the two?
I think so.
Historically, the two areas of the economy which have been most impacted by monetary policy are housing and autos.
Those are two of the areas right now which are leading our recovery.
Evidently, low mortgage rates have contributed.
Household formation has also contributed at the housing sucker is -- the housing sector is an important part of the recovery at this point in housing prices going up are not only beneficial in terms of stimulating more construction, but they also improve the balance sheet of households and make them more confident and willing to spend on other goods and services.
You are not concerned that increases in mortgage rates could jeopardize the fragile housing economy?
The housing rates remain relatively low -- they are inching up.
We will have to monitor that and we will see how housing and house prices go from here.
Do you believe the labor market in which the unemployment rate hovers just below eight percent reflects a new normal as some have suggested?
What is a sustainable rate of unemployment in your view over the medium and long-term?
What in your view can be done to strengthen the labor force beyond the rate of employment, including wages, hours worked, and labor force participation?
I think we are still above the long run normal unemployment rate.
The projections of the participants of the esso -- of the fomc suggest the normal unemployment rate maybe closer to 5.2 or -- 25.2% or six percent.
That reflects the fact that people don't have the right skills for the available jobs, who are located in the wrong parts of the country, so training, education, improving the functioning of the labor market, there are things that can be done through labor force policy that could lower unemployment further than the fed can through just increasing demand.
Say for instance in the african-american community, where male unemployment hovers around 13% or 14%. do you think the labor department and community colleges and others need to do a better job of connecting job training to targeted growth industries?
I have seen some very good rogue rams where employers, -- some good programs where employers and community colleges try to work and link people with jobs.
And the community college revise the right training.
My time is up.
The chair recognizes the gentleman from alabama, chairman emeritus of our committee, mr.
Chairman bernanke, i'm not seeing a lot of discussion concerning the reduction in treasury issuance with the deficit coming down.
It seems like that would give you more latitude to reduce your purchases of treasuries.
Would you like to comment on that?
The fed still owns a relatively small share of all the treasuries outstanding.
It is true that as the new issuance comes down that our purchases become a larger share of the new flow of treasuries coming into the market.
We have not seen that our purchases are disrupting the treasury market in any way.
We believe they have been effective in keeping interest rates low.
That being said, depending on how the economy evolves, we are considering changing the mix of tools we use to change the high level of accommodation.
But the fact that they will be issuing less is a factor that you are considering, i guess?
We would consider that, but our view of it, which people disagree, our view is what matters is that the share of the totally own, not the share of the new issuance.
You mentioned last year in jackson hole that you've viewed and women as cyclical.
Do you still believe it is cyclical and not structural?
That's like my answer a moment ago.
Probably about two percentage points or so.
I would say the difference between 7.6% and five point six percent is what economists would call cyclical or structural.
You think maybe five percent is structural?
So far, we don't see much evidence that the structural component of unemployment has increased very much during this time.
It's something we have been worried about because people in the -- people unemployed for two years or three years lose their skills and the concern as they become unemployable.
It still appears we can, we the country can attain an unemployment rate somewhere in the five.
Lex the most recent fomc minutes did not specifically addressed the seven percent unemployment target.
You mentioned it in your press conference, the 7% target discussed and agreed on in the meeting.
7% is not a target trade it is indicative of the improvement we want to see in the labor market.
I want to describe the conditions that would need to be met for us to proceed with our moderation of purchases.
We have a go around where everybody in the committee, including those who are not voting get to express their general views and there was good support for the broad plan, which i described, and the use of seven percent as indicative of the kind of improvement we are trying to get.
The fomc says the longer run predictable of the fed funds rate has been lower.
Do you agree with that?
A rough rule of thumb is that long-term interest rates are roughly equal to the inflation rate plus the growth rate of the economy erie it -- economy.
To the extent that in the aftermath of the crisis and other reasons the economy has a somewhat lower real growth rate going forward, that would imply a lower equilibrium rate as well.
Gdp estimates continue to come in, they were too optimistic.
Earlier, you said one factor is that policy decisions made by congress to a certain extent, the sequester and failing to address the long-term short-term changes in the entitlement program.
That's right erie but we should also keep in mind these are very rough estimates and they get revised.
You get someone different numbers when you look at gross domestic income instead of gross domestic hot.
But yes, as i have said a couple of times already, -- gross domestic product area -- gross domestic product.
The chair now recognizes the gentlelady from new york.
It is my understanding we are going to be believed did not have the opportunity to ask questions at the last one, so the next person would be mr.
Happy to do it.
It is just the list we received great but we are happy to recognize the government from colorado for five minutes.
I thank the chair and i think the gentlelady from new york.
chairman, it's good to see you.
As always, i just want to compliment you on being a steady hand through all of this.
In terms of fiscal policy, we had a very expansionary policy.
Now we have had a very contractionary policy.
To piggyback a little bit on mr.
Baucus 'question, i'm looking at your report that says the congressional office -- the congressional budget office says the current law generate 2.25 % in the structural deficit and will also restrain the pace of real gdp growth by 1.5% this calendar year relative to what it would have been otherwise.
What does 1.5% of gdp mean in terms of jobs and wealth?
1.5% is just a number.
What is it?
But it is very significant.
The cbo estimated 1.5% was something on the order of 750,000 full-time equivalent jobs.
With another 1.5% of growth, we would see unemployment down and other .7 or .8 grade it makes a big difference and it is very substantial.
We are hoping as the economy moves through this, we will see more rapid growth this year into next year.
You have a graph , and i don't know if you have the report in front of you, but the graph, total and structural federal budget deficit, do you see that?
Can you explain that graph?
It looks to me that at some point, you project or there is a projection here of no structural deficit in 2017 -- 2018. what does that mean?
Lex -- that means taking away the effects of the business cycle.
The business cycle causes extra deficit.
With the economy week, you get less revenue and more spending on social programs of various kinds.
What that is saying is if we were at full employment, in 2015, i believe it is, the structural deficit would be close to zero.
It is a cbo estimate.
I want to turn to some other questions.
You were asked about interest rates and you said we are at historically low interest rates . i would recommend to you and you know an app that you guys have called the economy.
This one shows how we have been doing over the last word years grade -- the last 40 years.
We were up here and then appear at 3.3% about two months ago.
So we have come way down except that in the last two months, what is good about this app is you can do it on a one-year basis.
On a one-year basis, it chose from april 2013 to the end of june, we went straight up.
About 33% increase in interest rates, which was from 3.3% to about 4.5%. are you talking about mortgages?
How does that come about?
Lex there have been three reasons for it.
The first is the economic news has been a little better.
There was a strong labor market report that caused deals to go up as investors became more optimistic.
The second factor is some excessively risky or leveraged positions on round -- unwound in the last few months . the tightening associated with that is unwelcome, but there is the benefit of perhaps reducing some of those positions in the market.
The concern i have, and i think was expressed by other members is the underpinnings of this recovery is housing is beginning to get much stronger.
It was historically so weak, but this kind of increase if it continues, is going to slow that down.
Don't you agree?
I agree that we need accommodative monetary policy for the future.
I have said that.
The chair now recognizes the gentleman from california, mr.
bernanke, will welcome.
I want to thank you for listening to us on the recent ruling on basel three.
You acknowledged insurance companies are very different from banks and postpone any negative decisions on that and i think that was a wise move grade you are aware the consider -- the committee is not to consider a housing reform bill.
I've always -- you had a hybrid situation where the private sector made all the prophets of the taxpayers took all the risks which was problematic from the beginning.
You could go back to a time when there per function -- when their function performed very well, but they created problems in recent years.
They did not adhere to underwriting standards.
They were chasing the market rather than playing a cyclical role.
That has been problematic.
But now we look at the situation and say what we do and where do we go?
The function of the gse's as it applies to conforming loans, with -- with the private market be able to provide liquidity to the market and what about a time of crisis?
Would investors be there to purchase mortgage-backed securities and would interest rates rise in that kind of situation?
I agree with your analysis of gse's and the fed for many years was warning about lack of capital, implicit guarantees, the conflict between con -- between public and private motives.
We agree something needs to be fixed.
There are a number of lands for reform.
One of the key questions is what role if any the government should play area it seems clear the private sector should play a bigger role than it is now.
In order to protect the taxpayer and increase efficiencies and allow for more product innovation, we would like to have more market participation.
In terms of what role the government should play, i don't know that.
If the government does play a role, it should be fairly compensated.
Instead of having an implicit aaron t -- an implicit guarantee, it should receive some sort of insurance premium.
I have argued for the position where if you are going to have a conduit or facility to replace the gse's, the profits should go into a reserve account to make sure it is solvent.
Then if the mortgage-backed security is sold, it should also go into an account.
When it builds up over seven or eight years, there's no need for a government guarantee because the reserves would be so huge that they would turn based on what they have done.
The problem we have had in the past is that when you have investors investing in gse's, the gse at that time chases market share to make investors happy.
That is not their role.
The role is to be countercyclical.
But i'm also concerned if we make a mistake, the government is still going to be on the hook because they're not going to let the housing market crumble if something goes wrong.
If you don't have some entity that is self-sufficient and has huge capital to make sure it can withstand the downturn, we're going to end end up in this situation again.
Maybe you can respond to that.
You either have to be 100% confident in what you set up or if you think there is a scenario in which the government would come and ask post, it would he a good idea to make sure the government gets paid appropriately and the rules of the game are laid out in advance.
Instead of the government, if you could create a facility independent of government established by government, let's say, that the prophets were held and they were not abused by congress as a slush fund, if you just looked at the prophets gse's are making today.
If there was an entity doing that backed by some guarantee for x amount of years to allow the market to recover and stability to occur, and those reserves in a gse alone would probably be $800 billion minimum.
If you charge a reasonable reinsurance fee, it's probably $200 billion.
You have a trillion dollars, which is six times the risk the government took in the worst turndown we've ever seen.
Would that not add to market stability?
The question is whether they can charge those fees if he had come tension and would you be allowing private sector competition?
They are not crowding in today.
We want to get the men but we need to provide a surety and the liquidity is my concern.
The time of the gentleman has expired.
The chair recognizes the gentleman from massachusetts, mr.
Chairman, i thank you for your service and willingness to come before the committee and help us with our work.
I want to stay right on that line of questioning.
As you may know, both the house and senate are actively considering legislative puzzles to reform the gse's, which i think most of us on both sides realize some reform is necessary.
I won't ask you to comment on any particular legislative proposal.
I'm not sure you would anyway.
But you are a scholar of the great depression and as you know, fannie mae and the fha , sort of creations of the new deal.
I want to ask you, historically, the 30 year fixed mortgage, which is a major innovation, prior to the government getting in and providing that backstop , was that available?
Was the private sector successful trying to create that?
During the depression, people usually took out five year balloon mortgages and refinance them sequentially.
In terms of the last 80 years of government support , that is what has created opportunities for middle income home owners, potential homeowners from getting into the market grade -- into the market.
As we are grappling with this reform, i'm concerned about what happens to rates.
I agree with mr.
Miller, there seems to be some requirement of a backstop at some point.
Obviously, you want the taxpayer to be as far back as possible.
You have been listening to live testimony from members of the house financing testimony, ben bernanke here on "market makers." we're going to get some thoughts from our guests.
We have michael mckee with us and a former member of the treasury department.
His job was to talk to a lot of the central bankers.
If you look at the market reaction, not really shaking things up.
This is probably exactly what an bernanke wanted to convey.
In hindsight, this is the message he wanted to give in may and june earlier this summer.
It's always fun to look at the questions from members of congress.
We often make fun of them, but they are fairly coherent area they are ranging from banking regulation, housing and the market interpretation of that policy.
Not a deep understanding of the economy, but maybe questions like the average person would ask great ben bernanke says he's not a qualified financial advisor and is not going to give advice on that area he did say that he recognizes the problem they had in communication and that volatility is bad for the markets.
We want to do everything we can to limit that.
That is something they are going to focus on as they go forward.
Has the fed backed itself into a corner when it comes to market reaction?
Without a doubt.
They are very sensitive to market reaction and they are going to react to it.
One thing he did say that i thought was interesting was that treasury purchases were not disruptive to the treasury market.
A lot of us would argue he's forcing investors into other asset classes, causing inflated alternative asset classes.
Quench -- which in theory was their goal.
He argued that the amount treasury owns -- that the fed owns, is more important than the flow.
I talked to a lot of people at treasury desks who say it is the other way around.
I think everybody has rushed back behind the scenes on this point and they have run up against the dead wall.
We are going to take a moment here to have a look at what's happening in the financial markets and see what kind of reaction there is to bernanke's remarks and the restaurant and answer session we have been talking about with the house financial services committee.
Stocks are still up, but not as much as they were before.
The s&p 500 at 1681, 6 points shy of its all-time intraday high.
A little shot from ben bernanke , the fed chairman, making what people enter it as dovish remarks about the way the fed is going to handle its bond purchases perhaps extending them for a longer time than people were assuming.
We could also pay attention to the european markets.
It looks like the bernanke boost his translating overseas with european stocks rebounding from a drop yesterday.
That was the biggest drop in more than a week.
We see the ftse in the uk and the backs and the cac all rising.
All a reaction at the weaker euro story which is surprising.
When you hear a dovish tone, that is usually a weaker dollar.
You're seeing a stronger dollar against the euro and against the japanese yen.
The euro-yen is stronger as well.
I just think ben bernanke's commentary, nothing crazy out of the ordinary from the fed chairman.
I want to draw everyone's attention to one stock -- american tower which owns a wireless communication tower services wireless companies like at&t -- the stock is dropping today.
One good reason for it, carson block, the short seller behind muddy waters has come up with a strong sell, saying the stock could fall as much as 40%. it's his first short call on an american company.
So are a couple of other companies in similar businesses.
They are not reits, but they more or less do the same thing.
Crown cap is another one down in sympathy.
Carson block goes out of his way in his research to praise the conservative approach crown cancel -- crown counsel has taken.
We will be going back to ben bernanke in just a second.
Be sure to watch the testimony.
? it is a 11:30 and this is "market makers" on bloomberg.
Al green is questioning ben bernanke who is testifying before the house financial services committee.
That can have a significant impact on long-term growth.
Confidence is important to growth.
I read through your paper, by the way, and i'm very excited about some of the things you have said, but i did not get quite enough on the question of competence.
Would you please elaborate a bit?
I think it is quite true that is this confidence , homebuilder confidence, consumer confidence are very important.
Good policies promote confidence.
That's the fed policy and congressional policy, we want to create a framework where people understand what is happening and believe and have confidence that the basics of macroeconomic stability will be preserved.
It is a difficult thing.
To some extent, it's a political talent to create confidence in your constituents.
Nobody has the magic formula for that, but clearly, the more we can demonstrate we are working together to try to solve these important problems, the more likely we will instill confidence in the public and that will pay off in economic terms.
I complement you and i would like to focus on one aspect of what you said about wanting to work together.
I contend this is an important element in instilling confidence.
I believe the american economy is quite resilient.
It is strong, notwithstanding some of the weaknesses that have been exposed.
The reason i know it is strong is because it has survived congress.
[laughter] if the economy can survive congress, i'm confident it will thrive eventually.
Things that we do, attempting to repeal some of the significant aspects of bills that have passed that will impact american people, i'm not sure how much confidence these things in g