Don't expect a jobs boom, Fed official tells local crowd

By Libby Clark and Courtney Sherwood

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photoA guest asks a question of keynote speaker, Dr. John C. Williams, President and CEO, Federal Reserve Bank of San Francisco, at The Columbian's 2012 Economic Forecast breakfast Tuesday January 10, 2012 at the Hilton Hotel in Vancouver, Washington. At left is Scott Campbell, Publisher of The Columbian newspaper.

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photoAbout 500 local business people and government leaders attended Tuesday's Economic Forecast breakfast at the Hilton Hotel in Vancouver.

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Click here to read Williams’ speech at The Columbian’s 2012 Economic Forecast Breakfast

Click here to read a local economist's recap of the event

The U.S. economy is growing and adding jobs, but that growth is so slow that unemployment will likely still be abnormally high for years to come, John Williams, president of the Federal Reserve Bank of San Francisco, told an audience of about 500 in downtown Vancouver Tuesday.

Williams expects today’s 8.5 percent national unemployment rate will gradually decline to about 7 percent by the end of 2014, he said at The Columbian’s 2012 Economic Breakfast, held at the Hilton Vancouver Washington. If Clark County’s jobless rate continues to be about 2.5 percentage points above the nation’s, that suggests that local unemployment would drop to around 9.5 percent over the next three years.

Williams pinned today’s economic problems firmly on a housing bubble that peaked in 2006 and 2007, and on the institutions whose complex financial instruments and risky decisions fueled the bubble and subsequent financial melt-down of 2008 and 2009. And he put much of the onus on state and federal governments to get things moving again, in part by finding more effective ways to help homeowners whose mortgages for more than their houses’ values.

If elected leaders in the U.S. and in Europe could overcome political gridlock, that could help lop a percentage point of the unemployment rate as well, Williams said. Uncertainty keeps consumers from spending and businesses from investing in growth, and debates over the federal debt and Europe’s handling of its financial crisis have exacerbated this, he said.

Though government bodies — through regulation, interest-rate setting and stimulus efforts — have the most far-reaching influence on the economy, businesses and individuals can make informed decisions about how to respond, Williams and other expert participants in Tuesday’s Economic Forecast Breakfast said.

“In 2008, 2009, 2010, we constantly heard, ‘Uncertainty is making me pause’” from business leaders too nervous to invest in growth, Williams said during a question-and-answer session with journalists that followed his keynote speech.

“They are getting used to the new normal of heightened uncertainty,” he said, in part by trying to become more agile at adapting to rapid change. For example, many companies are hiring temporary workers they can easily lay off if sales drop, rather than permanent workers who are harder to let go.

Individuals, meanwhile, can weather this period of high unemployment by developing in-demand skills, said experts on the “Jobs of the Future” panel, one of three discussion groups that met following Williams’ speech. The other panels tackled “Place: Changes to Where We Live, Work and Shop” and “Connections: Infrastructure that Underpins the Economy.”

Education — both formal training and on-the-job learning — is key to job security, said Rob Bernardi, president and chief operating officer of Kokusai Semiconductor Equipment Corp. and chairman of the Clark County High Tech Council.

“If you stop learning you will become unemployed and unemployable,” Bernardi said.

Despite rumors that members of the Occupy Wall Street movement might try to disrupt Tuesday’s Economic Forecast Breakfast, Williams’ speech and the subsequent panel discussions ran smoothly and without interruption.

Yet some at the event — including several presenting panelists — said they did take issue with points that he made.

In his initial comments, Williams emphasized the role that housing played in creating the recent recession.

Scott Bailey, regional economist with the Washington Employment Security Department and a panelist in the “Jobs of the Future” discussion, said Williams spent too much time criticizing home owners, and too little time examining the financial institutions whose loans fueled the bubble. Bailey also criticized Williams for ignoring a growing wealth and income gap in the U.S.

“Maybe I’m a little voice of Occupy out there, but I don’t see how we deal with these issues without going there,” Bailey said.

The housing bubble happened in part because major financial institutions did not adequately rein themselves in, Williams responded.

“Lax regulation, weak regulation was part of the problem,” and so far new rules have not been put in place to prevent another such crisis, he said.

The Columbian’s 2012 Economic Forecast publication, which includes forward-looking essays from 11 local leaders, will be included in Sunday’s paper.

Below is a live blog from this morning's keynote address:

Live blog from keynote speaker John C. Williams, president of the Federal Reserve Bank of San Francisco, at Tuesday's 2012 Economic Forecast Breakfast.

8:40 a.m. Williams concludes his keynote. Panelists are introduced. Follow the panels on Twitter at #2012growth or @thecolumbian for the real estate panel and @LibbyMClark for the infrastructure panel.

8:37 a.m. Question from the audience: Do really large financial institutions serve our economy well or do we need to take action on that?

Williams: "That's a critical issue going forward." Too big to fail; Lehman brothers proves that point. If they know they'll get bailed out, it creates an unfair playing field for smaller institutions. It's an issue we need to address.

The biggest threat to our financial system is whatever point in the future we're faced with the same situation we were in 2009. We don't want to be in the situation to bail out banks again. One way to prevent this is a tax based on the size of an institution. As they get bigger, they're required to hold more capital in reserve, which is kind of like a tax because they can't access that money. And it creates an incentive to not grow as big.

8:30 a.m. Question from the audience: What's unique about the economy in your district, the 12th district? (nine western states)

Williams: There are several areas of strength:

  • Trade with Asia. China is growing 8 percent or so, so the West Coast has an advantage that we're a hub for trade with Asia.
  • High-tech and biotech. The global demand has improved that area and provides long-term growth potential.
  • Many of our states having credible public education systems is one of our strengths. California's K-12 education is underfunded and that's disappointing.

But the big negative is housing.

8:26 a.m. Question from the audience: Any other ideas to solve the problem of homeowners underwater, along with HARP?

Williams: Policies centered around how to speed the foreclosure process. Right now it takes years to go through this and there's a lot of property destruction that happens in that process. You have people who would like to rent the house. Allow the owners to end the contract and allow them to rent the property for a price they can afford. We could create a market to get housing out of foreclosure and into rentals. Fannie and Freddy could be a good way to do this.

8:24 a.m. Question from the audience: What about the issues you didn't talk about, including the credit bubble, income distribution and lax regulation? Are we at risk for another blowup if deregulation isn't addressed?

Williams: Lax regulation is part of the problem. Deregulation wasn't very effective. It's a lesson the Fed and other agencies have learned, through regulation under the Dodd-Frank Act. We are trying our best to learn from the crisis.

8:20 a.m. Question from the audience. Without getting into whether it would happen, how would QE3 (round three of quantitative easing) make a difference?

Williams: The events of the last few years have been an incredible time for economists to get more data. When we push long-term interest rates down, it pushes mortgage rates down. The problem is there's a huge segment of the population that can't take advantage of that. If we were to lower interest rates again, it would help the population that could take advantage but it would still be relatively low. So the effect is weaker than it would be in normal times.

But policies that would relax the ability to refinance would allow people to access low interest rates.

8:15 a.m. Question from Courtney Sherwood, Columbian business editor: How do you boost the areas struggling the most and avoid over-boosting the areas doing well?

Williams answer: Enacting policies to resolve the housing problems more quickly, including foreclosures, is the answer. Real estate is not getting back into the market fast enough. Policies that help that speed up and be more efficient would help the areas hardest-hit by the problems. High-tech is the hot sector right now and trade with Asia has come back, but housing is the real driver of why some places are doing better or worse.

8:10 a.m. Transparency has helped improve the Fed's monetary policy, Williams says. Starting this month the Fed will publish its expectation of interest rates. This should reduce public uncertainty and confusion about what the Fed is thinking. It's pursuing other ways to improve transparency by making long-term monetary policy more clear.

Where the Fed goes from here will depend on what happens with the economy. The focus for now is to do its best to reach maximum employment and stable prices.

"2012 will be at least as interesting as last year," Williams said, "I know it's considered a curse to live in interesting times, but that's something we're going to have to accept the next few years."

8:08 a.m. "We're doing everything we can to stimulate the economy," Williams says. But "monetary policy is not magic." Lowering interest rates alone aren't going to make the economy grow 7 percent per year.

"Much more needs to be done outside the Federal Reserve," Williams says. Congress needs to think of policies to stimulate the economy in the short term, especially those focused on the housing market, he says.

8:05 a.m. Austerity at the state and federal levels are dampening the recovery, Williams says. The Fed can help by adjusting interest rates, but it lowered rates to zero in 2008. So it's created new ways to stimulate the economy by buying $1.5 trillion in long-term securities from government agencies and mortgage agencies.

8:01 a.m. Williams expects inflation to fall below 1.5 percent this year, less than the 2 percent rate last year.

The Fed has taken "extraordinary action" to boost growth, Williams says.

7:58 a.m. Looking ahead, Williams predicts GDP to grow nearly 2 percent this year and 3 percent in 2013. "Good, positive numbers," compared to last year's 1.75 percent. But that won't take a big bite out of unemployment. Currently it's 8.5 percent nationally and he expects it to be over 8 percent this year, and still be around 7 percent until the end of 2014.

He offers one caveat: Europe may be able to muddle through its crisis but if they fail, the U.S. won't escape unscathed.

7:51 a.m. The housing crash left a legacy of uncertainty that holds us back from longer-term investments and hiring, Williams said. It left a $6.5 trillion loss in housing wealth. And with the financial sector weakened, the stock market plunged. That led to subdued consumer spending.

Williams outlines several forces contributing to a slow recovery:

  • Nearly 30 percent of mortgages are now underwater, Williams says, so home sales are at the lowest level recorded since the 1960s.
  • Tight credit is also holding back our ability to spend. Small businesses are shut out of the loan market because they can't use real estate as collateral to borrow. Anecdotal evidence says credit is easing somewhat for larger businesses, but households and small businesses are still struggling to get credit.
  • Uncertainty is at a high level. Businesses are uncertain about inflation, and households about employment. "People are still very nervous." A high percentage think they won't see any income growth this year.
  • The crisis in Europe adds to a feeling of foreboding. This causes businesses to "step back from the playing field."

7:44 a.m. Williams: In 2008, if financial panic had remained unchecked, it could have reached a cataclysmic level. He reminds attendees that the Great Depression had 20 percent unemployment.

"So why didn't we fall into the abyss in 2008 and 2009?" Williams asked. A financial collapse wasn't left unchecked. The Fed "did what it was supposed to do" and acted as a lender of last resort, he said.

Williams says the emergency programs, i.e. bank bailouts, weren't kept secret. The only thing that wasn't disclosed at the time were the names of specific borrowers and the number lent to them.

The vast majority of emergency lending has been repaid and generated $20 billion in interest income.

These actions were essential, he said "There's no doubt in my mind these actions averted a depression." But we couldn't avert a recession, he said.

7:38 a.m. Williams explains the housing bubble as the source of U.S. economic turmoil. Housing prices were 70 percent overvalued in the 2000's, he says. Since then, house prices have plunged 30 percent nationwide.

That sent off a chain of events in which "borrowers behaved like you'd expect them to do," Williams says, collecting their debts. At one point, 10 percent of mortgages were in trouble.

7: 35 a.m. Williams calls the recession the "worst since WWII" and expects economic growth to be "frustratingly" slow and the unemployment rate to remain high for many years.

7:32 a.m. John C. Williams, president and CEO, Federal Reserve Bank of San Francisco, which represents nine western states, takes the stage.

He will speak about the U.S. economy and what the Federal Reserve is doing to encourage economic growth while keeping the rate of inflation low. He'll also talk about what the Reserve is doing to bolster the economy and forecast where the U.S. economy is headed. The Reserve has two goals: maximum employment and stable prices.

7:24 a.m. Stacey Graham, chief strategy officer at First Independent Bank, a sponsor of the event, says this is a time to make New Year's resolutions but also a time to sit back and think about what we're thankful for.

This might be a time of disruption for some employees at the bank, Graham says, but she's thankful the bank directors were aware enough to look at what was going on in the community and the world and say, "maybe it's time to make a change."

First Independent sold to Spokane-based Sterling Savings Bank in November.

Graham introduces the keynote speaker, John C. Williams, president and CEO of the Federal Reserve Bank of San Francisco.

7:20 a.m. Columbian publisher Scott Campbell welcomes about 500 Forecast Breakfast attendees. He encourages the audience to follow the live Twitter stream with the hash tag #2012growth or by following @thecolumbian.

Federal Reserve Bank of San Francisco President John C. Williams is the keynote speaker at Tuesday's 2012 Economic Forecast Breakfast, run by The Columbian. His speech, which will start shortly after 7 a.m. at the Hilton Vancouver Washington, will be followed by three panel discussions looking at challenges and opportunities facing Clark County leaders as they aim to kick-start economic growth.

Watch this story for live-blogging coverage of the speech. Columbian reporters will also be posting Twitter updates with the hash tag #2012growth. And Scott Bailey, regional labor economist for the state Employment Security Department, will join The Columbian for a live Web chat at noon Tuesday to discuss and recap the 2012 Economic Forecast Breakfast.