Tuesday
Jul152008
Bernanke distinguishes the facts from the fear
Tuesday, July 15, 2008 at 12:40PM
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.
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.
Capitol Hill reacts to government bailouts
"Enough is enough...We've got to bailout the taxpayer from bailout mania," said Rep. Jeb Hensarling (R-Texas). Hensarling and other House Republicans spoke out against government intervention in the market, including the recent government assistance of Bear Sterns, AIG and the takeover of government sponsored enterprises Freddie Mac and Fannie Mae. Hensarling, along with Marsha Blackburn (R-Tenn.), Michelle Bachman (R-Minn.), Tom Price (R-Ga.), Scott Garrett (R-NJ), and Tom Feeney (R-Fl.)
"The government is the lender of last resort," said Price. He said that risk is an inherent part of the free market system. Price and Feeney emphasized their view that the government is socializing risk as profits are kept private. The recent moves to facilitate sales and give loans to struggling financial giants by the Treasury Department are expected to add to the long term debt to be absorbed by the tax payer. "Again we believe that any short term gain by bailing out one another financial institution is not worth the long term pain of the moral hazard of taking us...to a lost decade of economic growth," said Hensarling.
Following a press conference to highlight recipients of certain government assistance programs like the Children's Health Insurance Program and the Low Income Energy Assistance Program, Senator Harry Reid (D-Nev.) and House Majority Leader Steny Hoyer (D- Md.) addressed the bailout of American International Group.
Reid, the Senate majority leader, decried "secret meetings" between Congress and the administration to lay out government assistance measures. "I think it's time that there's more than one branch of government. The American people deserve some transparency." Reid said that he believed that the Senate could do something to stabilize the economy by passing a bill to fund infrastructure before the current session comes to an end.
Hoyer said that there would be hearings in both the Financial Services and Oversight committees. He said that Financial Services Chairman Barney Frank (D-Mass.) would look into the future of regulations and that Oversight Chairman Henry Waxman (D-Calif.) would investigate what happened to lead up to these government bailouts. Hoyer said that committee would answer the questions "What went wrong? Why did we not regulate? Why did we not have the referee on the field?"