Bernanke rolls the dice on what seems to be a bad bet

RobertBrusca's picture

In Ben Bernanke’s speech to the National Association of Business Economists, he argues that the main reason for unemployment being stubbornly high was not a structural reason but a cyclical reason. Thus he has made the call for economic policies to spur demand as a solution.

So far markets seem to like it.

I find myself on the opposite side of this argument.

The table below looks at the five categories of unemployment by reason. These data reveal the percentage point contribution to the overall rate of unemployment from each type of unemployment. The table clearly shows that ‘by reason,’ or at least by most reasons, unemployment is very close to or below the averages for each component for recoveries lasting 32 months since 1970. The BIG exception is ‘not-temporary layoffs where 3.9 pct points of the overall rate is created. Compared to 2.5 pct points of contribution on average this is where the main problem resides. And there is a slight contribution from the category, labor market re-entrants, which at 2.2pct points in this cycle compares to an average of 1.8 pct points. There is a small relative elevation here.

There is a chart I would like to insert here but cannot. You can find it a

Most of the excess in the ‘unemployment rate’ in this cycle comes from the category ‘not-temporary’ layoffs. This category contributed 3.9% points to the overall rate and is higher than the highest previous cycle at this stage (2.7 pct points) and higher than the average for this category by 1.4 pct points. The rate for new entrants is above average too; the two together add 1.8pct points to the overall rate of unemployment in the cycle. Without these two categories in excess the unemployment rate could now be around 6.3%.

The category ‘job losers’ is split into two parts. Typically it dominates the unemployment picture. The category ‘temporary job losers’ refers to those former workers on temporary furlough during the recession. They may be unemployed for the moment but are waiting to be called back to work. In contrast ‘not-temporary job losers’ are those who lose jobs but are not waiting to be called back. Either they were fired or their firms went out of business or the plant they worked for was closed, etc.. This category is the one most likely to be affected in job changes of a structural nature.

Not surprisingly for temporary job losers unemployment tends to fall rather quickly in a recovery; it tends to be only 65% of its end recession level 32 months later (our current data are for the 32nd month of the expansion). While unemployment among not-temporary job losers tends to be a lot stickier; it averages 92% of its end recession level 32 months later. Not-temp jobs losses when they loom large as a share of unemployment (as they do now) should tend to make the duration of unemployment longer. And that is just what we are seeing.

I think Bernanke is barking up the wrong tree. The duration of unemployment is not ‘a problem’ it is ‘a symptom’. It is symptom of large not-temporary job losses and that is a symptom of structural change. One thing to remember is that this is a statistic for people who are STILL unemployed. The duration data possibly are made SMALLER by potential workers getting discouraged and dropping out of the labor force. Discouraged drop outs tend to have been unemployed for a while…And if this happens and after dropping out they come back in, when the job market improves they will appear as unemployed- that’s right- re-entrants.

What we find in cycle is that the drop in temp job losers is almost exactly what is normal; levels are 65% of their recession end level.

Of the two ‘problem’ categories, the drop in not-temp job losers is larger than average as it is 78% of its end-recession level compared to an average of 91%. Re-entrants, the other category that is relatively high in this cycle, are 101% of their end recession level and that is lower than the 104% that is normal at this time in an expansion. It turns out that reentrants are contributing more to the rate of unemployment despite a slightly better-than-normal drop off because at the recession end the unemployment rate of re-entrants was relatively high.

On balance the strongest evidence we have is that the real unemployment problem stems from the classification unemployed for not-temporary reasons. This bulge explains the slow drop in the overall rate and the extended period of unemployment. It suggests more directly than Mr Bernanke’s indirect evidence that the real unemployment problem is from permanently closed businesses causing permanent job loss, the kind that is hard to make up by just driving demand harder. In other words our unemployment problems look to be more structural than cyclical.


To defend Bernanke, he does not want to tighten policy right away. He believes he has learned a lesson from the Great Depression. And having that ‘knowledge’ he must express the unemployment problem as malleable for he will lose the option to use discretion if he does not. If he endorsed the argument that the unemployment rate elevation is structural he could not easily call for the Fed to run a continuing easy policy. But if this is the reason for his policy choice then he is aware that with this choice comes a greater danger of inflation. (I have no proof that Bernanke has chosen to say unemployment is more cyclical than structural because he needs to say that that to run the policy he wants to run. If he did such a thing this it would be doing things backwards, in some sense; picking the policy then choosing the rationalization). Still if Bernanke is doing this he knows there is a risk. And I don’t think he would let inflation run out of control. As a policymaker he is in a tough spot. The Fed is under more political pressure than ever before. He does not want the Fed to lead rates higher so he will lag and let the market make the judgment on the economy. He will ‘err on the other side,’ by keeping policy as easy as he can for as long as he can, hoping that the unemployment problem really is more cyclical than structural. In the end he will not let inflation go too far before he switches to fight it. Although Not-Temporary unemployment is slower to fall in a recovery than temporary unemployment, the drop in the not-temp level of unemployment is the second fastest (in percentage terms) among the last six economic recoveries. So it is proving to be somewhat malleable, so far.

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brettd's picture

Why is it that folks conflate "the market" with "the economy?"

There's ~5000 companies (listed) in "the market."

But there are over 5 million companies in the USA.  

The "markets" are a small subset of "the American economy."


TheMerryPrankster's picture

by manipulating the stock value of the smaller subset,they seek to influence the pyschology of the masses into beleiving what they hear rather than what they are living through.

It is therefore in the interest of those who seek to influence us to conflagrate these two distinct elements as if they were one.

The question then is the central bank in bed with the cia who control the media or is the cia in bed with the central bank who control the money? Who influences whom? Who is dominant?

ebworthen's picture

Too bad the monetary rivets of central banking become brittle in cold waters.

Born-Again Bankster's picture

Alrighy Mr. Zuckerberg...thanks for the IPO shares.  That speech and an Obama victory should keep everything on pace until those selling restrictions are lifted.  Mazel tov.



Clowns on Acid's picture

How'sa housing market Bobby?

3rivers's picture

I love to see you missing what will be the biggest rally of all time.

Uber Vandal's picture

Biggest Rally of All time?

You are right, we missed that Zimbabwe Rally, didn't we.

That is why EVERYONE there were Billionaires, too.

TheMerryPrankster's picture

Biggest rally implies biggest bust. There is no added value only added manipulation. Where there is no true worth, how can there be true value?

facebook  worth more than the entire solar system? apple worth more than the sun itself? perhaps the illusions are not what they appear to be. Every gravy train eventually runs out of track.

mikemcsaudi's picture

The problem with economists like Mr. Bernanke is that once they admit they are wrong then their careers are over. Humility is trumped with pride. Insanity then ensues as they begin to believe their own failed policies. No other option.

The other side of the coin with him is that I really feel he is bought and sold by the banksters. Not sure if I'm convinced that a few elites are running the entire world, but I am convinced that debtors become slaves to the lender. The countries of the world are so in debt to the banks that they have to listen to them. The banks DO run the world.

I actually enjoyed Dr. Brusca's opinion. Not because he disagreed with Bernanke, but because I enjoyed his argument. It made sense ... Common sense.

RockyRacoon's picture

When Ben is out blathering about the barbarous relic to all those young minds full of mush -- look out!

The bearded weirdo on the street corner holding the sign is right:  The End is Near!

azzhatter's picture

Berspankme has only one hope that people go out and lever up and borrow to continue living beyond their means. It's his only hope and it won't happen

ClipperBASIC's picture

Made a deposit at the local bank the other day, and the teller made a big push for some REWARDS BASED card.

The banks are becoming more like used car salesmen and its really starting to show.

Born-Again Bankster's picture

That is probably because the FDIC stopped allowing traditional community banks to open 3 years ago.  Until the moratorium on new bank charters is lifted, you will never get good old fashioned George Bailey banking ever again.  Socialism at its finest. 

Bartanist's picture

OK, so there is your problem right there. The guy charting the course for money policy is either a lying PoS or a moron. I tend to believe that he is the former, rather than the latter and he WANTS high unemployment so that the US is destroyed, global government can take over and people become enslaved. ALL OF THE SUPPORTING EVIDENCE LEADS TO THE SAME CONCLUSION.

Obviously none of Berstinky's policies have done anything except put more power in the banks and government and created greater fear and dependency for the average American; who now can't take a trip to the crapper without regulatory approval and paying taxes for the privilege.

There is no intention of fixing America, by waiting out the cycle or fixing the structure. The intent is weaken the country and its people to such a point that they have no will or resources left. Tell me do Bernanke and his masters benefit more from a strong and independent nation or a slave state? ... NUFF SAID.

AnAnonymous's picture

Bernanke does not want high unemployment in the US.

But some results of Smithian economics, the core of US citizen economics, are difficult to reverse.

Not only that, but US citizens living in the US of A wont want the results to be reversed.

As an environment grows more expensive, certain jobs are normally expelled from the environment as the activity is no longer suitable to the environment.

The US of A has built accumulating wealth for decades now, empoverishing other places in the world in the doing.

You cant built a royal suite palace and thinks the sweeper will afford living in.

The sweeper will live elsewhere.

Smithian economics have always generated the demand for a non residential workforce, calling for outsourcing.

Bernanke can not pushed in this direction and expect to evade one of its consequences.

brettd's picture

We "empoverished" the middle east, Mexico and Africa by sending it trillions for their oil?

And Mexicans/Hondurans/Guatamalans come to America because the "royals" there have pushed them out?

Havana is a beautiful, thriving city that attracts thousands of immigrants because??????

Italian-Americans are throwing down their brooms in America and returning to Italy for all the opportunities there?

African Americans are leaving America for Uganda and Nigeria because of the hope, safety and justice found there?

Good luck with that.


Be_Prepared's picture

The Bernank can no longer take the other side of the market to fight inflation because the U.S. National Debt would implode as the interest payments from just the existing debt would start to be a major portion of the entire federal tax revenue.  The way OBummer and our Crony Representatives love to spend money.... another 1.5 Trillion this year.... the pressure to keep interest rates low will be, as it is now, the only priority of the Fed.  The Fed has crossed the Rubicon and now only has one tool left..... to be the buyer of first and last resort for U.S. debt... and when the time is right... print to inflate it away.

As the author of this article, you are assuming that the Bernank, the Banking Cartel, OBottom and Congress give a rats a$$ about the citizens of this country.... which they don't.... if they can keep the fiat illusion going, they don't care if it bleeds us dry.... what's a few million dead when you can spend a few trillion.

RobertBrusca's picture

I believe Bernanke is an honest man and an academic. As someone said, 'He is so smart, he may be the smartest guy in every room he walks into.' Quite a burden.

Yet he does not show the ego you would expect from such a person. If anything he seems to lack confidence sometimes, but this is getting better. He also has political pressures his own knowledge set and his personal judgments about what policy should do.

That's what I think/assume.


Be_Prepared's picture

The hardest thing to realize for anyone is that sometimes what is required is to just take the painful medicine in order to be fully cured... rather than to take little sips of sugar water and hope that the disease will go away on its own.  I don't think he is the smartest person in the room and your adoration of him is quite evident.  I don't love or hate him because I don't know him, but his actions tell me he is a blind man serving the few over the many.  As an author and contributor, I would like you to be more critical of any idea or person.  If you have never served in government, you don't know that it is the morass of the worse thinkers incapable of running anything efficiently.  Bernanke has allowed himself to blinded by his academia bias and serving Greenspan made him a bureaucrat.  Bernanke took the easy way to serve the idea that it was better for America to live with failed banks and bank management than to purge and rebuild.... all for the idea that it was better to avoid the hard pain of putting iron back into the truth of our financial system.  He has only succeeded in concentrating the wealth of this nation with the worse bank CEOs this country has ever seen.  He swore an Oath (See here) to serve the American People first, but he seems only set on serving the whims of the Executive Branch and, more importantly, the Board of Directors of the Federal Reserve.  Yes, there would be tremendous pressure on him to do the right thing, but that's the "real" job he's required to do.... which he is not!

TireBite's picture

"He will not let inflation go too far before he switches to fight it." - Are you kidding me? How will he fight it? Can anyone answer the following:
1- how high will interest rates go to supress ~7% yoy inflation?
2- what effect will the increase in rates have on government expenditures and payments on interest on the national debt?
3- what will rising rates do to the banks loaded up with govt Tbills?
4- what will rising rates do to home prices, and how will this affect homeowners willingness or ability to borrow against their home to increase consumer demand?
5- what will rising rates do to the bank balance sheets since they own mortgaged from question 4?

I read another article by Robert Brusco the other day, it was about as worthless as this one.

RobertBrusca's picture


1. why 7%
2. revenues rise and interest costs rises. Because taxes go up and are progressive inflation amplifies tax revenue. More kicked up to the AMT and denied deductions.
3.T-bills no problem the are 3-, 6-, or 12-months in maturity and roll off.
4. Higher inflation probably raises home prices. Higher inflation will raise mortgage costs but if house prices rise, too that is an offset. It would probably make banks more willing to lend with rates higher and collateral (house prices) rising in value.
5. banks large initiate mtgs these days and and sell thier originated mtgs into mortgage pools not keeping many for themselves Securities with pooled MTGs would get hurt.Variable rate mortgages are no problem.

That's OK you can stop reading my articles. Your questions are more worthless than my articles.

Do you think 4,000 people are interesting in the half formed ideas behind your ill-conceived questions Tirebiter?


Assetman's picture

I think Brusco brings up some decent points, but I also think it's a little dangerous to off-handedly assume that Bernanke won't let inflation get out of hand.

Why?  Because Bernanke has already set the stage for establishing inflation targeting parameters at the high end of what has histroically been considered a "comfort zone" of pure price stability.  He seems to go even further out on that limb by trying endorsing a policy that assumes aggressive accomodation leads to higher economic growth, which leads to more jobs... appearently without thinking about the adverse (not unintended) consequences of unstable prices.  At 2%, inflation appears to be in a new comfort zone... but is Bernanke's intolerance line for inflation at 3 percent?  5 percent?  How about 7 percent?

No one really knows the answer to that, unfortunately.  But Bernanke could be wrong and could be well too late in pulling that punchbowl.

That being said, I think the whole argument about strucural vs. cyclical unemployment in forming current monetary policy is a distraction and a ruse.

I think the only thing that matters for the Fed at this point is being able to control the long end of the Treasury curve.  They will either monetize or will sterilze the loads of debt they intend to purchase.  The former will risk further USD devaluation and inflation; the latter might put pressure on short rates.  But they will still buy like madmen beyond 7 years to keep the U.S. government from debt implosion.


RobertBrusca's picture

It's not 'an assumption' but neither is it something you can take to the bank (a solvent one).

Since being chairman he has kept inflation at about 2% and the core below 2% despite a huge energy shock. He says he will not let inflation go wild. He is a a man of substance, not a political hack. So as much as you can trust a policymaker I trust him- even more.

I do not think he is above making a mistake, but I do think if he does he will rectify it.


skipjack's picture

I was enjoying your responses until that one - inflation at 2% ?   Are you kidding me ?  What you really mean is that he has manipulated inflation statistics to be what he wants.


Look, we all know what's going on here.  There's deflation in what you don't need (owning a house), and inflation in everything else you absolutely must have - food, energy, rent.  Additionally, wages are decreasing for the masses who do have jobs, and taxes are increasing.  Bernanke has no handle on any of this, other than to make it all worse.  He's pushing on a string.  The only reason it all hasn't gotten out of control - yet - is because the shadow banking system is collapsing faster.


Bernanke is as helpful as a leaf in a hurricane, and none of this is going to end well.  There is NO instance where a country in massive debt ever gets out of it except by defaulting, with all those consequences.  Every country across the globe is in the same condition - massive debts, no way to stop incurring more or to pay them off.


It's just a matter of time before the one card that brings down the house, blows.

brettd's picture

Ben has NEVER wavered:  His single, driving fear was deflation.

Inflation will be the beast the new administration will be forced to battle.

Remember, after Cater, the first 12-24 months of Reagan were ugly.

Double-digit T-bills and the rest.

Be prepared for even tougher sledding this go-round. 

rsnoble's picture

I'm putting $800 in the bank tommorow made under the table. If they can't get shit going..........I will. Fuck 'em.

RockyRacoon's picture

I agree with your ending sentiment, but if I had a stray $800 it wouldn't be going into a bank.  Fer sure.

YesWeKahn's picture

Bernanke isn't an idiot, but he is.

sasebo's picture

Bernanke is a pompous psycho ----- period. He's mentally ill.

disabledvet's picture

He hasn't "said" anything. Weak minded people such as yourself THINK he has said something. Interestingly..."the market thinks he has said something." When I listen he doesn't appear to be saying anything i should be commenting on...let alone writing an article about.

jusman's picture

Step back and realise that the bounty the first world has enjoyed is disappearing as the second and third world catch up and we become one world.  Sure, I know my life will be more difficult in the future, but morally can it be right to get upset if I can only have 2 TVs in order to let 10 families live above subsistence somewhere else?  There are limited resources on this planet, and their use is slowly becoming more balanced among the haves and have nots.  It will be painful, but slowly oh so slowly I am confident we will get there, with an awful lot of posturing and fighting and arguing, and likely not in my lifetime.  The day to day machinations are fascinating.  But sometimes one needs to step back and see the big picture.


brettd's picture

"There are limited resources on this planet...."

Ah, it's there, you're wrong ole chap, because you overlook the most important resource of all:

The unlimited resource of human imagination.

An because of it, the world economy/quality of life is not a zero-sum game. 

My gain likely provides opportunity for others, and in just the same way, the gains of others

can provide opportunity for me. 

Bartanist's picture

Part of the big picture is that by raising the prices of food commodities globally, the banks who own the Fed are starving more people to death now than every before. Is that the big picture? Make food more expensive so that Children in Africa and other less developed countries die? If you say yes, then I will believe you... because it sure seems that way.

Nice way to help out the third world.

AnAnonymous's picture

US citizen extortion business has to be run at the benefit of the extorted.

So says US citizen propaganda.

steve from virginia's picture


How can there be inflation if there is structural unemployment? Where is wage pressure going to come from?

Bernanke's corner is effect of moral hazard on gas prices while the Fed needs to buy Treasury paper. Fed buys and the motorists pay the price ... and the economy crashes leading to lower prices and higher bond prices.

This is NOT Bernanke's strategy but an outome to be avoided.

In a liquidity trap, increased rates are ipso-facto inflation so Bernanke is indeed in a corner.

RobertBrusca's picture

Basically structural unemployment is like someone set off neutron bomb and x% of the labor force is no longer there. It's wiped out. Those people do not count; economically they do not matter. So the labor force that affects the economy is really smaller than it looks. As a result bottle necks arise sooner than expected. Inflation is a bigger danger that you might think (the GDP GAP is smaller that it seems... etc)

This is - in some sense- the OPPOSITE argument from 'the unemployment rate is understated'.

The unemployment rate may be higher or lower (than the official one) but the the number of people that really affect the economy is a smaller number.

One question the labor dept does ask is have you looked for a job in the past week? One that they do not ask is are there any jobs in your area at all?

I grew up in Michigan. GM has shuttered plants around the Flint, Saginaw, Bay City area. There are multiplier effects. Auto-making plants close other businesses close,the knock-on effects knock-on. People are out of work; there are no jobs.

If a guy looks for a job in the job market but there are no jobs is he really unemployed? If a tree falls in the forest and no one hears it is there sound? Is the guy who keeps looking for what is not there still unemployed or is he just a fool?

It will take a long time before any house price rise in this region or until they have jobs and are really employed or really unemployed. Does it matter what you call them besides screwed??

They are on the sidelines for the game of growth until something (structural!) happens in their region. They are underwater on their mortgages so they can't move, at least not until they are evicted. (freedom, just anther word for nothin' left to lose. Nothin' ain't worth nothin, but its free...- I guess old Kris saw this one comin')

This is the darkest of the dark side of America.

It is one of the things that is structural unemployment. Clearer now?


ffart's picture

How was there inflation for the last 3 years? Oh right the dollar caught AIDS and it's wasting away in a wheelchair in some nursing home.

Vampyroteuthis infernalis's picture

How can there be inflation if there is structural unemployment? Where is wage pressure going to come from?

One of the reasons we are not going to see hyperinflation within the next couple of years to several years. The other is excessive debt load. Every printed Benniebux is ending right on the bank's balance sheets to remain there. The multiplier effect is broken.

AmCockerSpaniel's picture

So the banks can't loan the Benniebux, but with them on the banks balance sheets it leaves room for the banks to lend what ever bucks are also on there sheets. But the issue is that Ben may not let the banks roll over some of his zero interrest, short term, bucks. When and if this happens, it forces the banks to call back their bucks. So what to do. Ans. is to go into the market and buy commodities (easy to sell & get the bucks back). Ah; Commodities, like food and oil? This Ben and his friends the bankers know what they are doing.

Thomas Jefferson's picture

Bernanke is never going to raise interest rates meaningfully.  To do so would sink the US treasury.  Where do thing Bernanke apologists come from?

Corn1945's picture

Bernanke can do whatever he wants because he knows he will never be held accountable.

How many people have seen the infamous YouTube video where he gets everything wrong? Yet this guy still controls the savings and family fortunes of the developed world!

We have a cultural problem in the Western World, Bernanke is just a symptom of it. 

RobertBrusca's picture

Oh man I guess I need to get a Phd in U-tube-onmics.

You can't serious take that as a critique of the Fed?

I guess the nightly news is Jon Stewart?

Corn1945's picture


It's seriously time to do something about these guest posters.

This is coming from a long-time reader who sees serious cracks developing here.

Get some non-inflammatory, competent guest posters before the reputation of the site is permanently damaged.

The current poster is ignoring VIDEO evidence of Bernanke admitting he totally missed every single financial hardship we are under-going.

Ghordius's picture

Robert, in the post you write "...he does not want to tighten policy right away"

let me put it another way: can the FED tighten at all as long as the US deficits are at those levels?

RobertBrusca's picture

Yes they can.

But of course the Obama campaign rhetoric was 'yes we can.' but once elected it morphed into I guess we can't... or why even try... or let's do this instead... or, hang the rich people and let the poor feed on their guts or some such. It reminds me of the progression in Animal Farm.

So maybe 'yes they can' is not really an encouraging responses.

but there you have it.


lotsoffun's picture

no.  bernanke is helping the cause.  he is not a symptom.  he knows exactly what he is doing.  feeding banksters and robbing every one else.