Ben Bernanke was one of the most powerful people in the world, serving as the chairman of the U.S. Federal Reserve during the worst financial crisis since the Great Depression.
That meant Bernanke had to be extremely careful choosing his words. His slightest utterance could send markets into a panic. But Bernanke stepped down from his chairman role last year.
Now that he is finally free to say what he wants, what would he say? When we heard he was speaking at the World Business Forum in Sydney yesterday we had to go to find out. Here are the highlights from his presentation, and why they matter to Aussie investors:
On getting subprime wrong:
"Subprime mortgages were a small asset class. We calculated that if all subprime mortgages went bad on the same day it would have only been the size of a bad day on the stock market. The problem was how fragile the system had become."
[Foolish takeaway: If there is one big, huge, unmistakable lesson to take away from Bernanke's presentation, this was it. The Federal Reserve had not just considered the risk from subprime mortgages, they had thoroughly analysed it. And yet, they still determined that there was no chance that subprime mortgage defaults could cause a crisis.
That's like finding a red-back spider on your pillow, squinting at it for a bit, turning on a light to get a better look, then deciding that something so small couldn't possibly hurt you, and rolling over and going back to sleep.
Of course, as we now know, that judgement was terribly misguided. The lesson: In today's interconnected world, even small problems can have huge ripple effects.]
On China's slowdown:
Bernanke was asked if he thought China's growth would slow. He responded that a slowdown in China was "inevitable" and that the current growth model was unsustainable:
"China can no longer grow through its old model of construction, heavy industry and exports. The economy needs to move toward consumption. They are making progress towards that. The move away from command and control is difficult"
"There are risks in the Chinese system of a hard landing. For example, Chinese banks have significantly increased credit, and a lot of those loans are not very good loans."
Bernanke went on to explain that despite the risk he still feels that a hard landing is a "low probability" because the Chinese government's control of the economy should enable it to aggressively intervene if needed.
[Foolish takeaway: Joe Magyer and I visited China at the start of the year. We came away convinced that China was on an unsustainable path, and that the debt-fuelled growth model would not end well. So there are no arguments from us!
We are less confident though that the probability of a hard landing is low. The Chinese government does wield formidable powers. But as we saw with the subprime crisis, even problems that seem small and containable at first can quickly spiral out of control.
The lesson for Aussie investors: China's growth model is unsustainable. The mining industry, which has been propped up by China's construction boom should be treated with extreme caution.]
On the potential for housing and stock market bubbles:
"The Central Bank's point of view is not asking 'are asset prices where they should be?' That concern is for investors. Our concern (as the Central Bank) is whether there is a threat to the financial system.
I don't see anything that looks like the tech bubble, or other past bubbles, nothing that looks like it could threaten the system"
[Foolish takeaway: In Bernanke's view, it's not the Federal Reserve's job to worry about whether asset prices are too high, that is a concern for investors. The only concern for the Central Bank is whether there is a risk to the system itself. Given that the last two major U.S. recessions were caused by asset price bubbles, that dichotomy is debatable.
But either way, the lesson for investors is clear. Don't expect the Central Bank to save you from the market becoming overvalued. That responsibility sits with you. And as your Advisors at The Motley Fool, with us. The secret, as always, is remaining patient and investing in great businesses only when they are available at fair prices.]
On the Aussie dollar:
"If Australia finds it has a strong Australian dollar and it has higher unemployment, then it would have to respond and that would either be by increasing domestic demand or by weakening its own currency"
[Foolish takeaway: There should be no surprises here, but it is worth remembering. If the Aussie economy continues to struggle there is only one way that interest rates and the Aussie dollar are heading. Down.]
On moves to tackle the Aussie housing bubble:
"In Australia, the UK and other Commonwealth countries (they) are being particularly good at using various kinds of prudential policies to address concerns about housing prices, so I think that's the best approach."
[Foolish takeaway: Bernanke thought Australia's move toward macroprudential policies were a step in the right direction. After much nudging from the RBA, several Aussie banks have moved to slow the growth of their loans to property investors in recent months. Commonwealth Bank of Australia (ASX: CBA), the country's biggest lender moved to remove discounts for investment home loans, and its subsidiary, Bankwest, implemented a maximum loan-to-value ratio of 80 percent for investment loans. National Australia Bank (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) have also moved to scrap discounts for new property investor customers.
The measures seem to make a lot of sense to us, and its always good to hear an expert of Bernanke's calibre say you are on the right path. Although given the current level of property prices in major Australian cities, it's worth asking if those initiatives are too little, too late.]
Bernanke's lessons
Ben Bernanke's presentation provided clear lessons for Aussie investors. China's slowdown is inevitable. Problems in small sectors of the economy (just like subprime mortgages) can quickly spiral into big problems for the whole system. It is our job as investors, not the Central Bank's, to be on guard against asset price bubbles (Sydney house prices anyone?).
With the mining boom fast turning in to the mining crash, capital expenditure falling, and unemployment rising, Bernanke's visit to Australia could not have come at a better time.
Yet despite Bernanke's presentation being so applicable to Australia today, it seemed like a lot of his lessons from the crisis were falling on deaf ears. By the time he had finished talking many in the audience had already left to beat the rush-hour home. Or perhaps they wanted to be first in line for five-o'clock beers.
She'll be right, mate.
