It's (semi) official: We're in a recession.
The Federal Reserve chairman didn't come right out and say it in his appearance before the Joint Economic Committee yesterday, but in his carefully hedged, deliberate mumbo jumbo, Ben Bernanke delivered a message as stark as bread lines and shantytowns.
"It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008, and could even contract slightly," he testified.
It didn't take an economics PhD to crack Bernanke's code: Two quarters of economic contraction is the common definition of a recession. "Am I correct in understanding that you now believe a recession is possible?" asked the committee chairman, Sen. Chuck Schumer (D-N.Y.).
"A recession is possible," Bernanke affirmed, setting the news wires abuzz.
BERNANKE WARNS OF POSSIBLE RECESSION.
DOLLAR SINKS WITH US FED CHIEF SUGGESTING RECESSION IS POSSIBLE.
BERNANKE RECESSION COMMENT SENDS SHARES LOWER.
If anything, Bernanke is a bit late to the recession party. His predecessor, Alan Greenspan, wrote recently that the current financial crisis will be "the most wrenching since the end of the Second World War." And Martin Feldstein, whose National Bureau of Economic Research is the official arbiter of recessions, forecast a "substantially more severe" downturn than usual. "The situation is bad, it's getting worse, and the risks are that the situation could be very bad," he said last month.
But the Fed chairman's willingness to invoke the R-word carries particular weight because of his consistent habit of understating the nation's economic problems. Just six weeks ago, he was still forecasting "sluggish growth" for the first part of this year. Last July, he forecast that 2008 would be a time of "strengthening" above an already "moderate pace."
His view of the subprime lending debacle has been equally cheerful. A year ago, he testified before Congress that the subprime mortgage problem "seems likely to be contained." With characteristic optimism, he forecast: "We don't see it as being a broad financial concern."
With that history of prognostication, Bernanke's warning yesterday of a "possible" recession meant it might be a good time for people to hide their valuables and get a shotgun. "He came as close as he possibly could, given his responsibility to be a bit of a cheerleader," Schumer judged after the recession session.
Bernanke spoke in a weaker voice than usual. He sat on the front of his seat, hunched over the witness table, fingers tightly interlocked and veins protruding at the temple. He was still and patient as Schumer, in his opening statement, gave shrill warnings about "alarming" economic news and risk of "the kind of meltdown we saw in the Great Depression."
Sen. John Sununu (R-N.H.), whose already iffy prospects for reelection could be dashed by a recession, begged Bernanke to explain "the differences between the challenges the country was facing during the Depression and today." Bernanke, a Depression scholar, indulged Sununu in a discussion of Andrew Mellon's tenure as Herbert Hoover's Treasury secretary.
The history lesson must have inspired Sen. Bob Bennett (R-Utah), who traced the origins of the current mortgage crisis to the time "when people were buying tulip bulbs in Holland" -- during the 17th century. When the tulip bubble burst, Bennett explained, "the devastation that occurred in the Dutch economy destroyed it for 100 years."
But all the talk of Mellon and tulips couldn't disguise the fact that the economy is in what Bennett called a "liquidity crisis," Sununu dubbed "this crisis" and even Bernanke labeled "the financial crisis."
And Democrats on the committee were inclined to blame Bernanke for not keeping the crisis from turning into an all-out recession. "How effective do you feel when you're not having the type of impact I would anticipate you would have?" taunted Rep. Loretta Sanchez (D-Calif.).
The Fed chairman explained that he has been "fighting against the wind."
"I see you doing this, and I don't really see the kind of effect I would hope to see," Sanchez continued, asking what "other tools might be in your bag of tricks."
"We only have so many general types of tools," Bernanke explained.
Rep. Elijah Cummings (D-Md.) pleaded for help. "You're the expert. You're the one that we depend on. You're the superstar," the congressman said.
The superstar did not have a ready answer. "We're going through a tough period," he soothed.
But does "tough period" mean a recession? Rep. Maurice Hinchey (D-N.Y.) sought clarification.
"It's possible -- not certain, but possible -- that the first half of this year will be slightly contractionary," Bernanke repeated, pointing out that an official ruling would be made "well after the fact."
That answer didn't satisfy Hinchey. "I think we're in a recession now," he said. "I think we've been in a recession for some time, and I think that that recession is going to continue to get worse . . . six months from now, we may see it in a very, very bad situation."
The Fed chairman was not prepared to sound that alarm -- yet. "You know," he told the congressman, "I wish I had a simple answer for you."