Bernanke: Too Soon to Discontinue Stimulus

Dow Jones and the Standard & Poor’s 500 index have risen by 17 percent since the beginning of the year. The Nasdaq composite shows an increase of 16 percent.

Good times at the stock market, to say the least.

It will get better still, at least according to analyst Walter Zimmerman, who has claimed in an interview with NBC that the positive trend is so strong that it can’t possibly fail to continue a while longer.

To prove his theory, he uses data from earlier years which show that there will be cause to bring out the champagne by the end of the year.

But his is just a theory, like any other theory, of course.

By now, you all know that neither he nor any other analyst can say anything for certain. Their analysis is speculation, pure and simple.

But the stock market, fed by stimulations from the central Federal Reserve bank, has sustained impressive growth. Particularly if you keep in mind that there have been, and still remain, several sinkholes along the way.

As late as today, Federal Reserve Chairman Ben Bernanke stated before Congress that which we already knew: In his opinion, the country is still too weak to stand on its own. The stimulus must continue and interest rates must be kept low.

Bernanke claimed that a premature restriction of monetary policy may lead to a temporary rise in interest rates, but that this policy also entails a significant risk that the economic recovery will be slowed or halted, which will lead to a further drop in inflation

Bernanke contends that the current monetary policy offers significant advantages. He adds that an unemployment rate of 7.5 percent is far greater than it should be in a healthy economy and that higher taxes and governmental cutbacks will hamper economic development next year.

The central bank is currently pumping $85 billion every month into the economy and has made it clear that the support will continue until unemployment reaches more tenable levels, around 5 percent.

Among the most important parameters for the U.S. economy to really take off is the housing market. Lately, prices have risen, the number of repossessions has dropped, and the amount of new construction projects increased. Good news, obviously. But is it good enough?

For the housing market, too, there is a long way to go until it reaches healthy levels.

Last year, the federal government provided guarantees for 84 percent of the new loans, amounting to $1.9 trillion. That’s risky. A new crisis would mean another great economic setback for the taxpayers.

This support for the housing market by the government was a temporary solution. It was intended to be retracted as soon as the crisis was over, but more than four years after the economy bottomed out the economic backing is still comprehensively alive. There isn’t even a reasonable plan for how the retraction of aid is supposed to be carried out.

Sheila Bair, former head of the bank safety agent Federal Deposit Insurance Corp., recently said in a speech that the housing market is still very weak and that it is far too soon to disregard fears of a renewed crisis. In her opinion, there is a large possibility that prices will fall and the recovery will be lost. First of all, Sheila Bair points out the risk that banks are currently holding a large supply of repossessed homes, which they will try to sell as soon as the market improves. A greater supply would lead to falling prices. Secondly, she notes that countless millions of homeowners still have debts exceeding the value of their homes, a problem in and of itself which can also result in lowering prices in the future when homeowners may finally be expected to be able to sell their homes without suffering a loss.

A fresh report from the Alliance for a Just Society also notes that repossessions last year gouged out $192.6 billion of the public’s savings. That amounts to about $1,700 per household. The report also reveals that another $221 billion may disappear, unless the government comes to the aid of those borrowers who are too deeply indebted.