November 25, 2020
By Paul Bubny
“This is a very unusual recession,” Dr. Ben Bernanke, who served as Federal Reserve chair during the previous downturn, said on a recent webinar hosted by Marcus & Millichap (NYSE: MMI). Instead of the recession originating from inside the economy, this one resulted from an “outside shock”: the COVID-19 pandemic and the measures taken to control the spread of the virus.
Additionally, Bernanke said, the pain points have been different this time around. In the Great Recession that began in late 2008 and in other downturns preceding it, the sectors that were hit hardest were “interest-sensitive,” e.g., housing, car sales and consumer durables.
In the current downturn, “where we’ve seen the pain is in service sectors,” said Bernanke. That puts limits on the effectiveness of actions the Fed has historically taken to address downturns, which have revolved around lowering interest rates to stimulate the economy. “The Fed can’t do too much about the fact that people won’t go to restaurants, or they won’t go to get their hair done.”
Further, although recessions have tended to be unequal in their impact, “this has been a particularly bad episode, because the services industries are where … lower-paid, less skilled, [and] minorities are concentrated,” said Bernanke. “They’ve taken the biggest hit.”
As a consequence, fiscal policy—i.e. government spending and taxes—is especially important this time around. “Fiscal policy can help monetary policy get the economy back on track. It also can be much more focused than monetary policy.” Monetary policy affects the entire economy, but “fiscal; policy can affect more directly those sectors and those groups of people who most need the help.”
He pointed to the passage of the CARES Act as an example of fiscal policy in action, and to such Fed actions as cutting interest rates to near zero as an illustration of successful monetary policy. “The monetary and fiscal response was very strong early on. And that has shown up in a substantial recovery.”
That being said, Bernanke added, “We still have a long way to go. We’re in a deep hole, we’re missing 10 million jobs.” Longer-term, he said, “I think the recovery is going to be much slower than it’s been during the summer.”
For one thing, he said, there’s the resurgence of COVID-19 and even the availability of a vaccine won’t truly impact the pace of recovery until late next year. For another, “The low-hanging fruit has been picked.” Third, Congressional action has been weaker than it was this past spring. “We’re just not seeing the follow-through from the CARES Act.”
Bernanke discussed the potential for the current lack of legislative action to cause further damage in terms of slowing the recovery. He also weighed in on the actions we may expect from Congress in the Biden administration, the current Fed framework, lessons to take from the Great Recession and the near-term outlook for commercial real estate sectors. The latter, Marcus & Millichap CEO Hessam Nadji pointed out, have “varied widely” in terms of the impact the pandemic and recession have had.
Nadji, who moderated the discussion along with TruAmerica Multifamily CEO Robert Hart, began the hour-long webcast by setting the stage. Among other things, he charted the current employment picture, with 10 million Americans out of work compared to 22 million who lost their jobs during April and May.
“The improvement has been notable, but very uneven,” said Nadji. “There’s been a huge impact on lower wages and minimum wage jobs, which is an important part of how we might anticipate some challenges in the recovery.” At the other end of the spectrum of impact from the downturn, “the savings rate has created a potential for future release of pent-up demand.”
Replays of the Nov. 18 webcast are available by clicking here.
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