Eight Takeaways from Ben Bernanke’s Conversation with Marcus & Millichap

What does the man who oversaw the Federal Reserve as it tried to help the country recover from the Great Recession think about the U.S. economy’s ability to bounce back from the COVID-19 pandemic?

During a conversation webcast hosted by Hessam Nadji, CEO of commercial real estate services firm Marcus & Millichap and co-hosted by Robert E. Hart, CEO of TruAmerica Multifamily late last week, Dr. Ben S. Bernanke sounded largely hopeful, noting that if the U.S. can get the virus under control within the coming months, likely with the help of a vaccine, the economy might recover quicker than it did from the last downturn. The reasons include a fundamentally sound financial system this time around and aggressive action by the Federal Reserve.

Bernanke stressed, however, that companies and workers in the hardest-hit services sector, as well as state and local governments facing drastic budget cuts, would need the help of another stimulus package not to drag out the recovery. And while he expects the federal government to pass some kind of a stimulus, its ultimate dollar value will likely come down to who ends up controlling the Senate after the elections in Georgia in early January. A Republican majority would mean a stimulus package with a likely price tag of $1 trillion or perhaps even lower. A Democratic majority would be more likely to lead to a more sizeable stimulus.

Here are some takeaways from Bernanke’s remarks:

1. While he praised the early and aggressive response to the crisis by the Federal Reserve Chairman Jerome Powell, Bernanke noted that the Fed’s monetary policy alone won’t be enough to alleviate the pain inflicted by the pandemic on the leisure and services sectors, where the majority of the 10 million U.S. jobs that remain missing since March have been shed. “The Fed can’t do too much about the fact that people won’t go to restaurants,” he said. That was one reason Bernanke stressed the importance of another federal stimulus package to help hard-hit businesses and unemployed Americans stay afloat until the virus is under control.
2. Another reason Bernanke feels that a second stimulus round is needed is to help state and local governments maintain essential services. Local governments slashing their budgets a big negative shock that offset part of the benefits of the federal aid programs put in place following the Great Recession, he noted. As he projected that the country might be looking at another six to 12 months of economic fallout from the pandemic, Bernanke said that with many of the existing stimulus programs running out at the end of the year and without more help from the federal government, “The Fed can help, and it has helped, but it’s not going to be enough by itself.” Among the areas where he feels the government should step in, he listed additional unemployment insurance payments, an extension of the Paycheck Protection Program, possible rental assistance, money for virus testing, tracing and distribution of a vaccine and help for state and local governments. “Unfortunately, it’s very controversial,” Bernanke acknowledged about the latter measure. “The Republicans are reluctant to do very much for Democrat-led states.”
3. Bernanke said he is not overly concerned about the amount of spending the federal government will have to undertake to deal with the pandemic as long as it eventually comes back to normal functioning. Right now, “the [government] debt is quite high.... In general, you want to have a sustainable level of debt. But right now, we have a temporary emergency,” he noted. “We really don’t expect this pandemic recession to last all that long. So, there’s scope for the government to use fiscal policy to take on debt” in the short term, with the understanding that eventually things will get back to normal. “And it’s made easier by the fact that interest rates are so low,” he added.
4. In the meantime, the low interest rates will continue to drive demand for housing, according to Bernanke. “Even when monetary policy gets back to quote unquote normal, interest rates are still going to be low,” he noted. In addition, there is currently a shortage of housing in many of the nation’s biggest cities. And the fact that many of the younger millennials have had to delay purchasing homes because their financial trajectory was disrupted first by the financial crisis and now by the pandemic will mean there will continue to be demand for housing for some time, Bernanke said. “I do think that in the very long run, our population is not growing as much as it has,” he cautioned. Both U.S. immigration rates and the birth rate are down. “But in the short term, housing is going to be a very good sector.”
5. When it comes to commercial real estate, the picture is more complex. According to Bernanke, the Fed has limited capacity to help commercial mortgage borrowers who are currently struggling with delinquencies because of unpaid rents. “That’s really got to come from the federal government. That’s something that people can do if there’s a re-up of the Paycheck Protection Program.” And the speed and extent of eventual recovery will depend largely on the property sector and whether the country can get the virus under control, with the next six months being a critical period. “But the low interest rate enviroments [will be] a tailwind for CRE,” Bernanke said, especially in a recovering economy where more companies might be looking for space. “And I hope a situation where the virus is only a minor factor would be a positive scenario for CRE.”
6. Asked about his thoughts on rent control regulations, Bernanke said he believes the solution to many cities’ housing crisis lies in expanding supply. “Like most economists, I think rent control has some serious drawbacks,” he noted. In his view, while zoning restrictions often have legitimate purposes, they can also be used by existing residents as a way to protect their housing values and prevent new people from moving in. “So-called NIMBYism, it’s bad for the city, it’s bad for the economy because these are highly productive areas, we would like to have more people to have access to these areas. Zoning has legitimate purposes, ... but again, [it’s about] changing policies in ways that would allow for responsible development, creating more units, having more density.... As you learned in first year economics, if you create more supply of something, the price will go down.” The federal government might help the issue by providing the necessary infrastructure—something Bernanke believes both parties will be able to agree on—but it will ultimately fall to local governments to develop viable ways to increase cities’ housing stock.
7. Bernanke also touched on the possibility of Fannie Mae and Freddie Mac becoming privatized, something that he doesn’t think is going to happen, especially with a Democrat-led administration coming in. “There is strong political support for what Fannie and Freddie do”—provide stability to the market—“so, I think some government involvement in Fannie and Freddie is very likely.” For the next four years, Bernanke predicts “status quo” for the agencies.
8. Finally, the former Federal Reserve chairman cautioned that the economic damage from the pandemic might last into 2022. This recovery is going to be gradual, he noted. In addition to the time it will take to manufacture vaccines and have enough people become vaccinated, service sector workers who have lost jobs may go some time without finding new employment. “To the extent that we can get the virus under control, you're going to see a much more rapid recovery in general ... than we saw in the financial crisis" because the economy doesn't have the same kinds of finacial issues. "So, the next six months are going to be very important.” At one point, Bernanke also referenced what happened after the Spanish flu epidemic of 1918-1919. “Over a 100 years ago, we had the Spanish flu, ... and then we had the 1920s”—a period of great economic growth.