Bernanke asks congress to do more for the economy

Ben Bernanke, Chairman of the Federal Reserve, testified before the House Financial
Services Committee on monetary policy and the state of the US economy. He stated that
despite rising oil and commodity prices and a mortgage crisis facing the United States,
our economy continues to grow, though at a subdued pace. These issues all require action from the US congress.

Of particular concern to Bernanke is the effect our economy is having on the job market and
housing sector. He stated that while all sectors have seen a decline in job availability, the construction sector has been particularly hard hit. This problem is made worse by
declining housing starts and a slowdown in the purchase of new homes. Currently, the
unemployment rate in the United States has risen to 5 percent.

Bernanke also addressed concerns over the rising cost of oil. He attributes this rise to an
increased demand from developing nations, as many of these economies have seen large
amounts of growth. This has caused both the global demand for oil and its price to rise. In
addition, Bernanke stated that the long term predictions of available oil supplies are
low, which could mean that higher oil prices will continue to plague Americans at the
pump.

The Chairman concluded by stating that he would like to see government do more to deal with our nation's housing crisis and rising rate of foreclosures. While in this last week the federal reserve authorized more lending to assist both Fannie Mae and Freddie Mac, who control trillions of dollars in the US mortgage market, congress has not done nearly enough to control the effects this crisis has on Americans.

Bernanke distinguishes the facts from the fear

The Senate Banking, Housing and Urban Affairs Committee held a full committee hearing on the Federal Reserve’s semiannual monetary policy report to Congress. Sen. Chris Dodd (D-Conn.) presided over the hearing and said that in considering the state of the U.S. economy, it is important to distinguish between fear and facts. Dodd explained that in the country’s markets today, in particular during the turmoil of recent days, far too many actions are being driven by fear, and are ignoring crucial facts. This neglect of the facts, Dodd said, has caused Americans to experience unprecedented hardship and uncertainties, and now more than ever, they need to know when things will start to turn around and when the country will get back on track.

Chairman of the Federal Reserve, Ben Bernanke, explained many of the significant challenges the U.S. economy and financial system have experienced thus far in 2008. Bernanke said that economic activity has advanced at a sluggish pace during the first half of the year, while inflation has remained elevated. Though the Federal Reserve and the Federal Open Market Committee (FOMC) have eased policies to counter weakness in economic growth and expanded some of the special liquidity programs and implemented additional facilities to support the functioning of financial markets and foster financial stability, the economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and other commodities.

Bernanke explained that investors have recently become particularly concerned about the financial condition of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Because of this, the Treasury announced a legislative proposal to bolster their capital, access to liquidity, and regulatory oversight. Healthy economic growth depends on well-functioning markets, thus, Bernanke said, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve.

Looking at the economy overall, Bernanke said that it has continued to expand, but at a subdued pace. The unemployment rate has risen to 5-1/2 percent, activity continues to weaken in the housing sector, and the labor market has “softened.” Bernanke explained that inflation has remained high and seems likely to move temporarily higher in the near term, while the price of oil currently stands at about five times its level toward the beginning of this decade. This surge in oil prices has been driven mostly by strong growth in underlying demand and tight supply conditions in global oil markets; the world economy has expanded at its fastest pace in decades, leading to substantial increases in the demand for oil. Bernanke also said that the decline in the foreign exchange value of the dollar, along with financial speculation, have added to the increase in oil prices.

Bernanke finished by saying that the possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth. On the other hand, upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation and some measures of inflation expectations have moved higher. Bernanke said that given this high degree of uncertainty, monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth.

Congress fearful of financial collapse

The House Financial Services Committee held a hearing on “Financial Market Regulatory Restructuring,” focusing on the risks large banking firms pose on the entire financial system. The Committee discussed what Congress could do to quell those risks and increase systemic strength, as the recent collapse of Bear Stearns stimulated fear of instability in the financial system. Chairman Barney Frank (D-Mass.), said there needs to be a regulatory authority of the financial system. He said he is optimistic of an international agreement to increase regulation.

Treasury Secretary Henry Paulsen testified that the regulatory system is indeed outdated and that some failed financial institutions can have systemic effects. He said that markets are seldom perfect and that it will be difficult to make policy changes quickly. But he said that progress is being made. Federal Reserve Board Chairman Ben Bernanke said that his department has plenty of tools to address threats to systemic stability, leaving decisions to make regulatory changes ultimately up to Congress, but legislation may be needed in the long term to increase oversight of large firms.

Fed called to answer for bailout of Bear Stearns

Why did you bail out Bear Stearns? It was the resounding question heard over and over in the Senate Banking, Housing, and Urban Affairs Committee hearing on "Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal Financial Regulators." Federal Reserve Chairman Ben Bernanke, SEC Chairman Christopher Cox, United States Treasury Under Secretary Robert Steel, and President of the Federal Reserve Bank of New York Timothy F. Geithner, all attempted to answer that question to Congress.

In his opening statement, Senator Chris Dodd (D-CT), said the stunning fall of Bear Stearns was matched only by the sweeping response to its collapse put together by the New York Fed and the Federal Reserve Board of Governors, which, with the support of Treasury, "exercised powers in some instances that had not been used since the Great Depression." However, he said, people on 'Main Street' are struggling to pay their mortgages, and so was the rescue of Bear Stearns justified to prevent a systemic collapse of financial markets, or was it a $30 billion taxpayer bailout for a firm on Wall Street?

Yes, but how big do you have to be, to be too big to fail? Senator Jim Bunning (R-KY) posed that question in his opening statement. Why, exactly, was it necessary to stop the invisible hand of the market? That is Socialism, he said, adding that he was very troubled by the failure of Bear Stearns. A big question, he said, was who let our financial system become so fragile?

Chairman Bernanke said the that pressures in the short-term bank funding markets have increased, and many lenders have been reluctant to provide credit to counterparties, especially leveraged investors, and they have increased the amount of collateral they required to back short-term security financing agreements. Credit availability is restricted, and some key securitization markets (including those for nonconforming mortgages) continue to function poorly if at all.

Bernanke, nearly at the end of his prepared statement, arrived to the explanation as to why they had assisted Bear Stearns. The news that Bear Stearns would have to file for bankruptcy, he said, raised difficult questions of public policy. "Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company." He said that our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of "critical markets." The damage caused by a default by Bear Stearns "could have been severe and difficult to contain."

The chaotic unwinding of Bear Stearns could have cast doubt of the financial positions of some of Bear Stearns' thousands of counterparties, Chairman Cox said. But a question remained on whether or not investors were at risk. Despite the run on the bank to which Bear Stearns was subjected, Cox said, its customers were fully protected. At no time during the week of March 10-17th were any of the customers of the Bear Stearns's broker-dealers at risk of losing their cash or their securities.

Under Secretary Steel gave an explanation as to why Bear Stearns was assisted, saying a strong financial system is vitally important for all Americans. When our markets work, he said, people throughout our economy benefit, and when our financial system is under stress all Americans bear the consequences. The focus was more on the strategic concern of the implication of a bankruptcy. The failure of a firm that was connected to so many corners of the market would have caused financial disruptions beyond Wall Street.

The risk has its protections, Geithner said. There is a substantial pool of professionally-managed collateral that was valued at $30 billion, the agreement on the part of JPMorgan Chase to absorb the first $1 billion of any loss that ultimately occurs in connection with this arrangement, and a long-term horizon during which the collateral will be safe-kept.

In the written statement of James Dimon, Chairman and Chief Executive Officer of JPMorgan Chase, he said they got involved in the matter because the collapse had the potential to cause serious damage to the financial system. They could not, and would not have assumed the risks of acquiring Bear Stearns without the $30 billion facility provided by the Fed, and that the transaction is not without risk for JPMorgan. However, they informed the New York Fed and Treasury that the risks were too great for JPMorgan to buy the entire company on their own. The statement also explains the reason for bailing out Bear Stearns: a Bear Stearns bankruptcy could have touched off a chain reaction of defaults at other major financial institutions, and the consequences could have been disastrous.

The repeated phrase by each and every witness was that the failure of Bear Stearns was a result of a lack of confidence. According to the written statement of Alan Schwartz, President and CEO of the Bear Stearns Companies, even though the firm was adequately capitalized and had a substantial liquidity cushion, "Unfounded rumors and attendant speculation began circulating in the market" that Bear Stearns was in the midst of a liquidity crisis. The unfounded rumors grew into fear and there was a run on the bank.

Chairman Ben Bernanke explains why the Fed "bailed out" Bear Stearns

Chairman of the Federal Reserve System Board of Governors Ben Bernanke testified at the Joint Economic Committee Hearing on "The Economic Outlook," attempting to explain to the committee why the Federal Government moved to save Bear Stearns from compete failure but is doing nearly nothing to save homeowners from foreclosures. "Normally," Bernanke said, "the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company… with financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence."

In his opening statement, Chairman Charles E. Schumer (D-NY) said it was "hard to disagree" with a need to take quick action to avoid the kind of meltdown as seen in the Great Depression, but wanted to know what justice there was in helping Bear Stearns and not millions of homeowners. He compared the actions taken by the Federal Reserve to moving at "a snail's pace, if at all." There are six principles to moving forward, Schumer said, and above all, the focus should be on controlling systemic risk. The regulatory system should be unified and simplified, the unregulated parts of the financial markets should be regulated, there must be greater transparency, and the "Laissez-faire view of this administration" in regards to "no regulation is good," needs to end.

Congresswoman Carolyn Maloney (D-NY) stressed the need for a bipartisan economic summit and said that there was a need to move quickly to "keep families in their homes and blunt the devastating effects of the weakening economy." She compared the Fed's creative, unprecedented, and controversial steps to ease the credit crunch to "the spontaneous improvisation of jazz." Wall Street has been helped, she said, and now it is time to help Main Street.

With a slightly trembling voice that belied his calm demeanor and instead evidenced his nervousness at appearing before the Committee, Bernanke said that although recent actions appear to have helped stabilize the situation somewhat, the financial markets remain under "considerable stress." Effects of the financial strains on credit cost have been increasingly evident, he said, and some portions of the system that had previously escaped the worst of the turmoil have been affected. "These developments in financial markets-- which themselves reflect, in part, greater concerns about housing and the economic outlook more generally-- have weighed on real economic activity," Bernanke said.

He said he expects the tax rebates to provide support to consumer spending, and also that he expects economic activity to strengthen in the second half of the year. Inflation, though, has been a source of concern. The pickup in inflation has been the result of increases in price of crude oil, agricultural products, and other globally traded commodities, Bernanke said. In addition, the decline in the foreign exchange value of the dollar has also contributed to inflation. "We expect inflation to moderate in coming quarters," he said, explaining that the expectation is based in part on futures markets' indications of a leveling out of prices for oil and other commodities. Clearly, he said, the U.S. economy is going through a very difficult period. Much financial adjustment has already taken place, and he said he remains confident in our economy's long-term prospects.