03 March 2009

Government Actions Seen Affecting Economic Recovery

Federal Reserve head cites “extraordinary challenges” of economic problems

Federal Reserve Chairman Ben Bernanke

By Merle David Kellerhals Jr.
Staff Writer

Washington — The effectiveness of actions taken by the Federal Reserve, the U.S. Treasury and other federal agencies in restoring financial stability will determine much of the timing and strength of the economic recovery, Federal Reserve Chairman Ben Bernanke says.

“We are better off moving aggressively today to solve our economic problems,” Bernanke said March 3 in congressional testimony. “The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment and incomes for an extended period.”

As a consequence of recent actions aimed at stabilizing the financial sector and restoring growth, the Obama administration submitted a fiscal year 2009 federal budget that projects a federal deficit of about $1.8 trillion this year and approximately $1 trillion in 2010 and again in 2011. That increases the debt-to-gross domestic product ratio from about 40 percent to more than 60 percent, Bernanke said in prepared testimony. The ratio has not reached that level since the 1950s.

“Our economy and financial markets face extraordinary challenges, and a failure by policymakers to address these challenges in a timely way would likely be more costly in the end,” Bernanke told the Senate Budget Committee. “All else equal, this is a development that all of us would have preferred to avoid.”

The U.S. economy contracted 6.2 percent in the final quarter of 2008, and Federal Reserve economists expect more decline in the first six months of this year, Bernanke said. “The near-term indicators show little sign of improvement.”

U.S. businesses laid off about 600,000 workers in January, which was about the same pace of job loss as in November 2008 and December 2008, he said. That has contributed to sizeable losses of equity and housing wealth, tighter credit, and households spending less, he said. New monthly unemployment figures are due out March 6.

“The goal of the fiscal package is not just to provide a one-time boost to the economy, but to lay the groundwork for a self-sustaining, broad-based recovery,” Bernanke said. It is unlikely there will be a sustainable recovery if there is not a reasonable degree of financial stability, he said.

“Although progress has been made on the financial front since last fall, more needs to be done,” he said.

President Obama met with British Prime Minister Gordon Brown at the White House March 3 to discuss the global crisis and review possible courses of action that will be discussed at the G20 conference of advanced and developing economies in London on April 2. Brown is chairing the conference; he says it is critical to improving global economic confidence. Brown speaks to the U.S. Congress March 4 and is urging the United States not to take a trade-protectionist stance amid the slackening global economy.

Bernanke said U.S. manufacturing output in January reached its lowest level since the end of World War II.

“Given the weak economic environment, many businesses have apparently cut back their plans for capital expenditures significantly,” he testified. “Moreover, exports, which had provided a welcome offset to the weakness in domestic demand through the middle of 2008, fell sharply in the final months of last year, and the incoming news suggests a widespread contraction in activity abroad.”

Actions taken by the Federal Reserve, other federal agencies and foreign governments have helped improve conditions in some financial markets, Bernanke said. Specifically, strains in short-term funding of markets have eased since last fall as some interest rates have declined.

One bright spot, he said, is that many businesses have managed to trim inventories in recent quarters.

Treasury Secretary Timothy Geithner told Congress separately March 3 that the current recession is made worse by a financial system that is unable to provide the credit necessary for recovery.

“You can see this across America as families find it difficult to get the financing they need to buy new houses and cars while businesses have trouble lining up the credit necessary to meet payroll,” he said.

Geithner said the U.S. government has taken on several responses simultaneously, beginning with a comprehensive economic recovery and financial stability plan, which is a package of targeted investments and tax cuts designed to get Americans back to work and get the economy growing.

To further spur lending to consumers for automobiles, education, credit cards and other types of loans, and to help small businesses at a time of extremely tight credit lending, the Federal Reserve announced March 3 a $200 billion program called the Term Asset-Backed Security Loan Facility.

In addition, the Obama administration initiated a program to help homeowners buy or refinance homes by encouraging low mortgage interest rates, Geithner said.