Saturday, November 05, 2011
Bernanke stresses role of fiscal policy in economic recovery
From The Hindu
The United States' recovery from the ongoing economic crisis was ‘much less robust' than what the Federal Reserve had hoped it would be and recent revisions of government economic data showed the recession as having been even deeper, and the recovery weaker, than previously estimated, according to Ben Bernanke, Chairman of the Fed.
In a speech that sought to shift more responsibility for driving the recovery to fiscal policy rather than retain the focus on monetary policy under the Fed Mr. Bernanke added that recent bouts of elevated volatility and risk aversion in financial markets were partly in reaction to fiscal concerns in the U.S. and abroad.
Touching upon the role of the bitter, macroeconmically-damaging debt limit negotiations between Democrats and Republicans earlier this summer, Mr. Bernanke said that the controversy resulting in the downgrade of the U.S. long-term credit rating by the Standard and Poor's rating agency “contributed to the financial turbulence that occurred around that time.”
Four key steps
By way of policy response the Fed Chairman noted that four key steps in terms of fiscal reform were needed. First, he said, it was necessary to achieve long-run fiscal sustainability; second, the federal government ought to avoid fiscal actions that could impede the ongoing economic recovery; third, fiscal policy should aim to promote long-term growth and economic opportunity; and finally, there was a need to improve the process for making long-term budget decisions so as to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy.
Labels: Ben Bernanke, fiscal problems, U.S. economy
Tuesday, August 23, 2011
Delink debt ceiling from fiscal negotiations: Bernanke
Ben Bernanke, Chairman of the United States Federal Reserve, has issued his sternest warning to lawmakers yet, to keep negotiations over the U.S.’ debt ceiling separate from the debate on restructuring longer-term fiscal priorities.
His comments this week came even as the U.S. Congress and White House are locked in no-holds-barred negotiations on raising the debt limit from its already eye-wateringly high level of $14.29 trillion.
While Democrats, who control the White House and Senate, need Republican support to push through the extension of the debt limit when the deadline of August 2 is reached, Republicans have thus far been unwilling to yield ground unless their demands for public expenditure cutbacks are met.
In this backdrop Mr. Bernanke said during a conference here, “I fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt limit is the wrong tool for that important job.”
Cautioning lawmakers that failing to raise the debt ceiling in a timely way would be self-defeating, Mr. Bernanke added that budget dynamics at this point were “unsustainable,” given that a larger public debt implied higher interest costs and this in turn caused the deficit situation to worsen further.
Citing some of the deleterious effects of such a gargantuan debt, Mr. Bernanke said it crowds out private capital formation thus reducing productivity growth. Further, he said, when the debt is financed by borrowing from abroad, a greater share of future income has to be devoted to interest payments to foreign debt-holders. Finally massive debt also poses a danger to policy as it impairs policymakers’ ability to respond effectively to future economic shocks, he noted.
While the consequences of a debt default would have serious ramifications for the sovereign rating of U.S. debt, an issue of equal concern to lawmakers in recent times is that fiscal cutbacks may impede the ongoing economic recovery, with the prospect of a double-dip recession not entirely ruled out.
Mr. Bernanke’s words may be heeded by Congress, however, as in April the Standard & Poor's credit-rating agency revised its outlook on the safety of long-term U.S. debt to “negative” from “stable.” Earlier this month another agency, Moody’s, warned that the U.S. risked “losing its triple-A credit rating unless swift and significant progress is made over its debt ceiling,” according to reports.
Labels: Ben Bernanke, U.S.’ debt ceiling, US economy
Tuesday, May 31, 2011
Use of debt limit as bargaining chip risky: Bernanke
From The Hindu
Economists are concerned that the U.S. debt ceiling now stands at $14.29 trillion, could be breached yet again later this month
The use of the U.S.' constitutionally-mandated debt ceiling as a political bargaining chip could risk further worsening the country's deficit or even lead to another meltdown in the U.S. economy, the head of the U.S. central bank, Federal Reserve Chairman Ben Bernanke warned this week.
Speaking before the Senate Committee on Banking, Housing, and Urban Affairs, Mr. Bernanke said, “Using the debt limit as a bargaining chip is quite risky.” His comments came in the wake of a series tussles over the U.S.' debt limit between Democrats, who control the Senate and the White House, and Republicans, who control the House of Representatives.
While the U.S. came perilously close to a federal government shutdown in April, owing to a stalemate over negotiations on increasing that limit, an eleventh-hour bipartisan deal was reached, averting the crisis.
However, economists are concerned that the U.S. debt ceiling currently stands at $14.29 trillion, and could be breached yet again later this month. In this context Republicans led by House Speaker John Boehner and Senate Minority Leader Mitch McConnell have said they would not agree to raising the debt limit unless Democrats conceded to major spending cuts to major mandatory expenditure programmes. Yet at his Senate testimony Mr. Bernanke cautioned, “It is a risky approach not to raise the debt limit in a reasonable time... At minimum the cost will be an increase in interest rates that will actually worsen our deficit”. He also indicated that more severe consequences could follow, arguing, “The worst outcome would be one in which the financial system was again destabilised... which of course would have extremely dire consequences for the U.S. economy.
Yet even as Mr. Bernanke addressed the Senate Committee, Mr. McConnell reiterated the Republican position, saying, “The things I'm talking about have already been studied to death. We don't need any more hearings... we know what the options are. The only question remaining is what will we pick up and agree to on a bipartisan basis”.
While President Barack Obama and his Democratic colleagues have agreed to numerous cuts in discretionary expenditure, they have thus far been reluctant to make sweeping cuts in three of the largest components of public expenditure – Medicare, Medicaid and Social Security.
Along with job creation and the economic recovery, curtailing the explosive growth of debt is likely to be one of the highest policy priorities as the November 2012 presidential elections approach.
Economists are concerned that the U.S. debt ceiling now stands at $14.29 trillion, could be breached yet again later this month
The use of the U.S.' constitutionally-mandated debt ceiling as a political bargaining chip could risk further worsening the country's deficit or even lead to another meltdown in the U.S. economy, the head of the U.S. central bank, Federal Reserve Chairman Ben Bernanke warned this week.
Speaking before the Senate Committee on Banking, Housing, and Urban Affairs, Mr. Bernanke said, “Using the debt limit as a bargaining chip is quite risky.” His comments came in the wake of a series tussles over the U.S.' debt limit between Democrats, who control the Senate and the White House, and Republicans, who control the House of Representatives.
While the U.S. came perilously close to a federal government shutdown in April, owing to a stalemate over negotiations on increasing that limit, an eleventh-hour bipartisan deal was reached, averting the crisis.
However, economists are concerned that the U.S. debt ceiling currently stands at $14.29 trillion, and could be breached yet again later this month. In this context Republicans led by House Speaker John Boehner and Senate Minority Leader Mitch McConnell have said they would not agree to raising the debt limit unless Democrats conceded to major spending cuts to major mandatory expenditure programmes. Yet at his Senate testimony Mr. Bernanke cautioned, “It is a risky approach not to raise the debt limit in a reasonable time... At minimum the cost will be an increase in interest rates that will actually worsen our deficit”. He also indicated that more severe consequences could follow, arguing, “The worst outcome would be one in which the financial system was again destabilised... which of course would have extremely dire consequences for the U.S. economy.
Yet even as Mr. Bernanke addressed the Senate Committee, Mr. McConnell reiterated the Republican position, saying, “The things I'm talking about have already been studied to death. We don't need any more hearings... we know what the options are. The only question remaining is what will we pick up and agree to on a bipartisan basis”.
While President Barack Obama and his Democratic colleagues have agreed to numerous cuts in discretionary expenditure, they have thus far been reluctant to make sweeping cuts in three of the largest components of public expenditure – Medicare, Medicaid and Social Security.
Along with job creation and the economic recovery, curtailing the explosive growth of debt is likely to be one of the highest policy priorities as the November 2012 presidential elections approach.
Labels: Ben Bernanke, Federal Reserve, U.S. economy
Friday, February 18, 2011
Bernanke warns of destabilising capital flows
From The Hindu
Ben Bernanke, Chairman of the U.S. Federal Reserve, said that challenges to macroeconomic adjustment and financial stability such as those seen during the financial crisis of 2008, arose in part because “the rules of the game of the international monetary system... are either poorly articulated or not observed by key countries.”
In a speech this week at the Banque de France Financial Stability Review launch event, Mr. Bernanke did not name any country in particular but said that emerging market economies had not followed through with “the policy responses that countries are expected to take to help foster a balanced global economy over time.”
Savings glut
Quoting a recent paper that he had authored, in which he identified a “global savings glut” as one of the factors that created some of the pre-conditions for the crisis, he said that it was an empirical fact that the global saving glut countries including “emerging Asian economies and Middle Eastern oil exporters” evinced a “strong preference for very safe and liquid U.S. assets... especially Treasury and agency securities.”
However, Mr. Bernanke added, the preference by many investors for perceived safety had created strong incentives for U.S. financial engineers to develop investment products that “transformed” risky loans into highly rated securities.
Thus, he said, it was remarkable that even though a large share of new U.S. mortgages during the housing boom were of weak credit quality, financial engineering resulted in the overwhelming share of private-label mortgage-related securities being rated AAA. “The underlying contradiction was, of course, ultimately exposed, at great cost to financial stability and the global economy,” Mr. Bernanke noted.
Touching upon recent macroeconomic concerns the Fed Chairman cautioned that while the global financial crisis was receding, capital flows were “once again posing some notable challenges for international macroeconomic and financial stability.”
Negative spillovers
He said that such capital flows reflected in part the “continued two-speed nature of the global recovery, as economic growth in the emerging markets is far outstripping growth in the advanced economies.”
Warning of some of the dangers of capital from advanced economies flooding emerging markets Mr. Bernanke said that some observers argued that monetary policies in advanced economies were generating “negative spillovers.”
“In particular, concerns have centred on the strength of private capital flows to many emerging market economies, which, depending on their policy responses, could put upward pressure on their currencies, boost their inflation rates, or lead to asset price bubbles,” he said.
Labels: Ben Bernanke, capital flows, financial stability, global economy
Monday, July 12, 2010
Fed chief Bernanke keen to boost credit for small businesses
From The Hindu
Federal Reserve Chairman Ben Bernanke cast some gloom upon recent claims of an economic upswing, arguing that small businesses in the United States were still very much facing the credit crunch.
Speaking at a Fed meeting series “Addressing the financing needs of small businesses,” here Mr. Bernanke discussed prospects for restoring the flow of credit to small businesses, saying, “the net percentage of survey respondents telling the National Federation of Independent Business that credit conditions have tightened over the prior three months has remained extremely elevated by historical standards.”
Job scene improves
The Obama administration came out strongly emphasising the improvement in job creation in the private sector for June as a sign of improving conditions in the U.S. economy. Last month, private-sector payroll employment edged up by 83,000 for the month and the overall unemployment rate edged down to 9.5 per cent. However overall employment declined by 125,000 for the month, reflecting a decrease of 225,000 jobs among the temporary employees working on the payroll of the U.S. Census 2010, according to the Bureau of Labour Statistics.
In his speech, Mr. Bernanke said that one measure of banks' loans to small businesses had dropped from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010. He added, “An important but difficult-to-answer question is, How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability?”
Mr. Bernanke suggested that all three factors had played a role and therefore to support the recovery, the U.S. had to find ways to ensure that creditworthy borrowers had access to much-needed loans.
Concerted effort
In that context the Fed Chairman said that over the past two years, the Fed and other agencies had made “a concerted effort to stabilise our financial system and our economy…. [which] included working to facilitate the flow of credit to viable small businesses.”
In particular the Federal Reserve had attempted to bring capital from the securities markets to small businesses through the Term Asset-Backed Securities Loan Facility (the TALF programme).
Mr. Bernanke noted that more than 850,000 small business loans were financed in part by securities whose issuance was supported by TALF. Further, he said, stress tests that we conducted last year helped restore confidence in the banking system, allowing banks to raise the capital they need to help offset credit losses and, ultimately, to provide the basis for new lending.
Despite these improvements in lending conditions, Mr. Bernanke struck a cautious note, saying, “Though we believe that our and others' efforts are making a difference, we also know more must be done, and that additional effective action requires hearing firsthand from knowledgeable people who can speak from diverse perspectives about the challenges facing small businesses.”
Arguing that facilitating small business financing was not a simple or straightforward matter, Mr. Bernanke said that the term “small business” encompasses a heterogeneous mix of enterprises, ranging from pizzerias to start-up technology firms, and hence “we should be wary of one-size-fits-all solutions.”
Overall, he said, making credit accessible to sound small businesses was “crucial to our economic recovery and so should be front and centre among our current policy challenges."
Labels: Ben Bernanke, credit crunch, Federal Reserve, TALF programme
Thursday, June 10, 2010
Bernanke still cautious on recovery prospects
From The Hindu
Ben Bernanke, Chairman of the Federal Reserve, struck a note of cautious and qualified optimism regarding the possibility of a sustained recovery in the United States' economy.
On the down-side risks Mr. Bernanke warned that market concerns have mounted over the ability of Greece and other European countries to manage their 'sizable' budget deficits and 'high levels of public debt'; and also the U.S.' own fiscal position had deteriorated 'appreciably'.
Yet, he noted, in a speech before the Budget Committee of the House of Representatives, "The recovery in economic activity that began in the second half of last year has continued at a moderate pace so far this year." He also added that on the inflation front, recent data continued to show a subdued rate of increase in consumer prices.
He added that the labour market, which was hard hit by the recession, had begun to show some 'modest improvement recently', in terms of employment — 431,000 more people were hired in May — hours of work, and labour income.
Markets cheered Mr. Bernanke's comments, rising during trading hours on Wednesday.
Indicating a positive prognosis for economic growth in the U.S., Mr. Bernanke said, "The latest economic projections of Federal Reserve Governors and Reserve Bank presidents… anticipate that real gross domestic product will grow in the neighbourhood of 3.5 per cent over the course of 2010 as a whole and at a somewhat faster pace next year."
Regarding the sources of growth in aggregate demand Mr. Bernanke cautioned that consumer spending was likely to increase at a moderate pace going forward, although it would be supported by a "gradual pickup in employment and income, greater consumer confidence, and some improvement in credit conditions".
Underscoring the role of the business sector in driving growth he said, that looking forward, investment in new equipment and software was expected to be supported by healthy corporate balance sheets, relatively low costs of financing of new projects, increased confidence in the durability of the recovery, and the need of many businesses to replace aging equipment and expand capacity 'as sales prospects brighten'.
Emphasising the risks that still remained in the system, primarily emerging from the turmoil in European markets, Mr. Bernanke noted that U.S. financial markets "have been roiled in recent weeks by these developments, which have triggered a reduction in demand for risky assets". He added that broad equity market indexes had declined, and implied volatility has risen 'considerably'.
However, he said that the actions taken by European leaders represented a firm commitment to resolve the prevailing stresses and restore market confidence and stability. "If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest," Mr. Bernanke added.
Labels: Ben Bernanke, Federal Reserve, global economy, U.S. financial markets
Thursday, April 15, 2010
Difficult choices ahead: Bernanke
From The Hindu
“Addressing the [United States'] fiscal problems will require difficult choices, but postponing them will only make them more difficult,” said Federal Reserve Chairman Ben Bernanke during a Congressional testimony on Wednesday.
Reiterating a note of concern about the country's fiscal position, which he also mentioned in a speech earlier this month, Mr. Bernanke cautioned that though sizable deficits were unavoidable in the short term, maintaining the confidence of the public and financial markets required policymakers to “move decisively” to set the federal budget on a trajectory toward sustainable fiscal balance.
In very similar language — and his language is carefully watched by U.S. economists to gauge his view on the economy's prospects — Mr. Bernanke said in an earlier speech that addressing the fiscal challenges posed by an aging population would require “a willingness to make difficult choices”.
In his testimony, he struck a more positive note arguing that “On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters”.
Mr. Bernanke, nevertheless, underscored “weakness” in residential and non-residential construction and the “poor fiscal condition” of state and local governments. He said that the sales of new and existing homes had dropped in January and February, and “the pace of new single-family housing starts has changed little since the middle of last year.”
He added that pressures on state and local budgets, though bolstered by federal support, “have led to continuing declines in employment and construction spending by state and local governments”.
While again striking a note of optimism on the job fronts for the future, he said that the present scenario appeared bleak: “The labour market was particularly hard hit by the recession. Recently, we have seen some encouraging signs that layoffs are slowing and that employment has turned up.”
He noted, however, that “if the pace of recovery is moderate, as I expect, a significant amount of time will be required to restore the 8-1/2 million jobs that were lost during the past two years”.
He expressed concern about the fact that, in March, “44 percent of the unemployed had been without a job for six months or more.”
Labels: Ben Bernanke, fiscal problems
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