Bernanke: Financial System Strained But Undergoing Stabilization

By Courtney Ann Jackson- Talk Radio News Service

Financial conditions are strained but have improved, according to the Federal Reserve Chairman Ben Bernanke's semiannual Monetary Policy Report to Congress.

“Today, financial conditions remained stressed, and many households and businesses are finding credit difficult to obtain. Nevertheless, on net, the past few months have seen some notable improvements,” Bernanke said Wednesday before the Senate Committee on Banking, Housing, and Urban Affairs.

Bernanke cited the narrowing spread of interest rates in short-term money markets, adding that equity prices are nearly beginning to recover to their levels from the end of last year. Bernanke also noted that the banks have raised “significant amounts of new capital.”

According to the Chairman, many of these improvements are due, in part, to policy actions by the Federal Reserve to encourage the flow of credit.

“Some banks are still short of capital, other banks are concerned about future losses, they’re concerned about the weakness in the economy and the weakness of potential borrowers,” said Bernanke. “Banks should be making loans to credit-worthy borrowers. It’s in their interest, the bank’s interest, as well as the interest of the economy and we’re working with banks to make sure they do that.”

During questioning, Bernanke explained to Committee members that consumer protection, transparency, and accountability continued to be priorities for the Federal Reserve.

Bernanke Says Economy Is Stabilizing, But Unemployment Rate Still Rising

By Mariko Lamb - Talk Radio News Service

The pace of economic decline has shown signs of gradual stabilization since April, but the labor market continues to weaken, said Federal Reserve Board Chairman Ben Bernanke during testimony before the House Committee on Financial Services Tuesday.

“Many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve to encourage the flow of credit,” he said. Federal Reserve recovery programs such as the Term Asset-Backed Securities Loan Facility (TALF) and the Supervisory Capital Assessment Program (SCAP), both implemented this year, have restarted classes of small business and consumer securitization markets, increased investor confidence in the U.S. banking system, and raised equity in public markets.

Despite better conditions in financial markets and optimistic economic prospects, the unemployment rate continues to rise. “Although the unemployment rate is projected to peak at the end of this year, the projected declines in 2010 and 2011 would still leave unemployment well above FOMC participants’ views of the longer-run sustainable rate,” Bernanke said.

Further Federal Reserve and Reserve Bank projections indicate “subdued” inflation over the next two years, a slight increase in output at the end of this year, and a gradual recovery starting in 2010 with some acceleration in 2011.

To quell GOP committee members’ concerns about the Federal Reserve’s extensive intervention in monetary policy, Bernanke said, “The extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed.”

Bernanke emphasized that the Federal Reserve is a non-partisan, independent organization and does not get involved in details of specific policy programs such as healthcare; however, he urged Congress to “think about the implications of the federal budget and make sure that we have a trajectory that will be sustainable for the medium term.”

Bernanke Says He Did Not Threaten Bank Of America CEO

By Annie Berman -- Talk Radio News Service

In a second hearing on the merger between Bank of America and Merrill Lynch, Federal Reserve Chairman Ben Bernanke testified that he did not threaten to fire Bank of America CEO Ken Lewis if the merge was not finalized.

In his June 11, 2009 testimony, Lewis claimed that he had decided to invoke a Material Adverse Change (MAC) clause, which would have stopped the merger between Bank of America and Merrill Lynch. Based on this information, it is possible that Lewis knew about Merrill Lynch’s major losses before the merger was finalized.

Bernanke claims that he was advising, not threatening, Lewis to not invoke a MAC clause because doing so would have been bad for the economy.

“[Bank of America] was obligated to make the choice they believed was in the best interest of their shareholders and company. I did not tell Bank of America’s management that the Federal Reserve would take action against the board or management if they decided to proceed with the MAC. Moreover, I did not instruct anyone to indicate to Bank of America that the Federal Reserve would take any particular action under these circumstances,” said Bernanke in his opening statements.

Lewis confirmed in his testimony that he wanted to invoke a MAC clause, but claimed that he had no prior knowledge of the huge fourth quarter losses that Merrill Lynch suffered in 2008. The committee concluded that Lewis would not have tried to invoke a MAC clause if he did not know about Merrill Lynch’s potential losses.

In this morning’s testimony, Bernanke also claimed that he did not know about Merrill Lynch’s losses prior to the merger.

“Mr. Bernanke, your staff believed that bank of America knew about Merrill Lynch’s accelerating losses in mid November, a full month before coming to you and weeks before it’s shareholders voted to approve the merger. Those 4th quarter losses rose to over $15 billion out of the pockets of Bank of America’s shareholders… The Fed knew what Bank of America knew [about the Merrill Lynch losses],” said Rep. Dennis Kucinich (D-Ohio).

Additional hearings regarding the merger are expected to take place in July. Treasury Secretary Hank Paulson is expected to testify in these hearings.

Dodd Applauds Obama’s Financial Regulatory Proposals

Speaking to a group of reporters following the President’s speech on overhauling the nation’s financial regulatory system, Senator Chris Dodd (D-Conn.) called Obama’s plan a “step in the right direction.”

Dodd described the President’s plan, which would give the Federal Reserve the ability to monitor risky investments made by financial companies, as an effort to reinvigorate the marketplace.

Although the Senator admitted that there is “not a lot of confidence in the Fed right now,” he professed that the agency has the necessary experience to properly assume this new responsibility. Dodd added that “sitting around, hoping things will work,” should not be the President’s way of dealing with this nation’s current financial mess.

Congressman Barney Frank (D-Mass.), who joined Dodd in speaking to reporters afterwards, took a swipe at Republicans, accusing them of turning a blind eye over the years as major financial companies made risky investments.

During his speech, President Obama described his plan as a means of “leveling the playing field,” for investors, both big and small. The President stressed his desire to promote free and fair markets by closing loopholes that exist in the current financial system. Specifically, Obama suggested it was time to crack down on intricate financial instruments such as derivatives, which he described as being “so complex, it’s impossible to know their actual value.”

The President also spoke of the need to move the country away from a bubble-based economy, adding that it is the duty of his administration to prevent scenarios in which private innovation negatively impacts the marketplace.

Obama also proposed holding mortgage bankers to higher standards, requiring hedge fund advisors to register with the FCC and creating an independent Consumer Financial Protection Agency to eliminate small print and ‘gotcha’ clauses found in mortgages, credit card and other financial agreements.

The President referred to these proposals as “common sense rules.”

Bernanke announces Transparency Initiatives for the Fed

Federal Reserve Board Chairman Ben Bernanke spoke Wednesday at the National Press Club about the Fed’s lending programs and balance sheet. Bernanke spoke about the tool kit used by the Federal Reserve to battle the economic crisis the country is facing. He said that the tools the Fed had at its disposal were programs that would promote liquidity for both financial institutions and money market mutual funds. He said that transparency of the system was important, for democratic reasons, but also to make sure people working with the market understand the system, to encourage the most effective market activity. With this in mind, the Chairman announced two initiatives that the Federal Reserve would be undertaking, the first of which was establishing a new website to educate and inform the public on relevant financial issues within the federal government. This website would consolidate all of the information previously provided by the Fed into one easily accessible place, and would provide explanations on all of it. Additionally, the Fed is going to review current publication and disclosure policies to ensure the public has access to information they “have a right to know”.

Concerning the President’s economic stimulus plan, Bernanke said that he cannot talk about specific components and apportionments, because those are up to the administration and legislators. He did say, however, that there were two necessary parts to recovery: financial stimulus to get the economy moving, and a stabilization of the financial systems. Several times he emphasized the importance of these two components, saying that the other programs will not work without these two pillars. The efforts to get the economy moving again will also specifically help small business, said Bernanke. He went on to say that the country should maintain a level of inflation that finds a balance between maximum employment and price stability over time. He saw very little risk of “unacceptably high” inflation in the short term.

By Michael Ruhl, University of New Mexico – Talk Radio News Service