Bernanke Warns Deficits Threaten Financial Stability - Bloomberg

[Soul Crusher]

Bernanke Warns Deficits Threaten Financial Stability (Update1)
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By Craig Torres and Brian Faler

June 3 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

Bernanke’s comments signal that the central bank sees risks of a relapse into financial turmoil even as credit markets show signs of stability. He warned the financial industry remains under stress and the credit crunch continues to limit spending.

The Fed chief said in his prepared remarks to the House Budget Committee that deficit concerns are already influencing the prices of long-term Treasuries.

Yields on 10-year notes have climbed about 1 percentage point since the Fed announced plans in March to buy $300 billion of long-term government bonds. The notes yielded 3.57 percent at 10:34 a.m. in New York, down from 3.61 percent late yesterday.

Rise in Yields

“In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen,” Bernanke said. “These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings.”

The budget deficit this year is projected to reach $1.85 trillion, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.

Bernanke also addressed banks’ efforts to bolster common equity in the aftermath of regulators’ stress tests on the 19 largest U.S. lenders. He said the 10 firms that were found to have a total capital shortfall of $75 billion have now sold or announced plans to boost common equity by $48 billion.

“We expect further announcements shortly” as the banks submit plans due by June 8, Bernanke said.

This year’s projected budget deficit, four times the size of last year’s shortfall, has been driven up mostly by costs associated with the financial crisis.

Causes of Deficit

A fiscal stimulus of almost $800 billion, the government’s financial rescue effort, takeovers of Fannie Mae and Freddie Mac and increased costs of running safety-net programs such as unemployment insurance have added billions to spending.

President Barack Obama has pledged to halve the deficit by the end of his term. Even if successful, his administration anticipates the government will still run what would be, by historical standards, large deficits for the foreseeable future. Bernanke said the debt-to-gross domestic product ratio is set to reach the highest since the 1950s.

Treasury Secretary Timothy Geithner, in an interview with Bloomberg Television May 21, said the administration’s goal is to cut the budget shortfall to 3 percent of GDP or smaller.

Rising government spending, forecasts for a record fiscal deficit and an unprecedented expansion of central bank credit have also fueled investor concerns that inflation will rise. Bernanke said inflation “will remain low” as the economy operates with slack resource use.

‘Dangerous’ Mix

Wisconsin Representative Paul Ryan, the ranking Republican on the committee, said in opening remarks that the Treasury’s debt issuance and the Fed’s monetary stimulus, including purchases of government bonds, “can be a dangerous policy mix” and risks “runaway inflation” in the longer term.

Ryan said he’s concerned about “substantial” political pressure on the Fed to delay plans to tighten credit should unemployment remain high.

“The Fed’s political independence is critical and essential for safeguarding its commitment to price stability,” Ryan said. “We policy makers should realize that our most challenging policy period is going to be ahead of us.”

In Europe, German Chancellor Angela Merkel yesterday she views “with great skepticism what authority the Fed has and the leeway the Bank of England has created for itself,” to purchase a range of assets in their efforts to end the crisis. She urged central banks to return to a “policy of reason.”

Bernanke said the economy is likely to suffer more “sizable” job losses, which will weigh on consumer spending. Still, Fed officials are looking for a recovery in growth later this year as housing demand stabilizes and companies balance inventories with overall demand.

Fed Purchases

The central bank is buying as much as $1.75 trillion of housing debt and Treasuries this year to lower borrowing costs across the economy after reducing the benchmark interest rate almost to zero in December. Fed officials hold their next policy meeting June 23-24 in Washington.

Bernanke reiterated the Fed will “soon” begin disclosing more information on its lending as part of efforts to “enhance” the central bank’s transparency. The Fed will issue monthly reports with “considerable new information concerning the number of borrowers at our various facilities, the concentration of borrowing, and the collateral pledged,” the chairman said.

That would fall short of demands by some lawmakers, including Vermont Senator Bernie Sanders, the independent who in April won Senate approval of a nonbinding resolution asking the Fed to identify borrowers.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Brian Faler in Washington at bfaler@bloomberg.net

Last Updated: June 3, 2009 10:40 EDT

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Dont take my word for it, even Bernake is saying what many of us have been saying. 

[Hedgehog]

You like Bernanke 3366?

[Soul Crusher]

You like Bernanke 3366?

Not sure.

[Al Doggity]

From this morning's Wall Street Journal. It contains a lot of the same information as the story you posted, but is also contains a lot more quotes from Bernanke, a lot more context and a clearer perspective of our overall economic picture. Pay special attention to the bolded text.


http://online.wsj.com/article/SB124403584900281215.html

Bernanke Urges Deficit Reduction, Sees Growth This Year


WASHINGTON -- Federal Reserve Chairman Ben Bernanke Wednesday urged lawmakers to commit to reducing the nearly $2 trillion budget deficit, warning that the government can't borrow "indefinitely" to meet the growing demand on its resources.

Mr. Bernanke also reiterated that the pace of economic contraction appears to be slowing, setting the stage for a return to growth later this year. But that growth won't be robust, he said.

"Unless we demonstrate a strong commitment to fiscal sustainability in the longer run, we will have neither financial stability nor healthy economic growth," Mr. Bernanke said in prepared testimony to the House Budget Committee. (Read the full remarks.)

He also told lawmakers that the Fed won't accommodate wider budget deficits by simply printing money, saying the central bank "will not monetize" the federal debt.

The White House estimates the budget deficit will reach about $1.8 trillion this year and narrow to about $900 billion by 2011. That, Mr. Bernanke said, will push the debt-to-GDP ratio to 70% by 2011 from 40% before the financial crisis began, which would be the highest since after World War II.

"Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate," Mr. Bernanke told the House panel.

However, the retirement of the Baby Boom generation will place even more of a burden on entitlement programs like Social Security and Medicare, and "we will not be able to continue borrowing indefinitely to meet those demands," he said.

Mr. Bernanke suggested that fiscal concerns may already be having an effect in the markets. Yields on longer-term Treasury securities and fixed-rate mortgages have risen, he noted.

"These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings," he said.

Mr. Bernanke adhered closely to the Fed's cautiously upbeat outlook for the economy. Consumer spending, he said, has been flat since the start of the year and sentiment has improved. Housing, he said, "has also shown some signs of bottoming" and lean inventories should eventually spur production.

Still, he cautioned that even when an upturn begins, growth will remain below its long-run potential "for a while."

"Sizable" job losses, he said, should continue for "the next few months," pushing the unemployment rate higher. The government releases May payroll figures Friday. Economists expect another payroll decline of over 500,000, raising the jobless rate past 9%.

Against that backdrop of widening economic slack, inflation should fall over the next year compared with 2008, Mr. Bernanke said, though an improving economy and stable inflation expectations "should limit further declines in inflation."

Meanwhile, Mr. Bernanke said the ability of banks to raise new capital "suggests that investors are gaining greater confidence in the banking system."

But while financial conditions have improved since the start of the year, they remain under stress and continue to act as a brake on the economy, he said.

Responding to questions from the panel members, Mr. Bernanke also said the government's efforts last year to inject capital into the banking system helped the U.S. avert a "calamity" in the financial system.

He told lawmakers that the Fed will release a list of banks next week that it thinks are eligible to repay loans they received under the Troubled Asset Relief Program.

He also noted that the U.S. current-account deficit has shrunk despite higher government borrowing, an indication that there is enough capital available to meet the government's financing needs.

Tuesday, German Chancellor Angela Merkel sharply criticized the recent liquidity policy of the Fed, calling for a return to what she called "sensibility." Asked to respond, Mr. Bernanke said he "respectfully" disagreed with her views.