Federal Reserve Chairman Ben S Bernanke endorsed additional fiscal stimulus, saying the credit crunch is “hitting home” as Americans find it harder to get loans, threatening a prolonged economic slump.
Lawmakers “should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,” Bernanke said in testimony to the House Budget Committee. “Such actions might be particularly effective at promoting economic growth and job creation,” he said, calling consideration of a stimulus “appropriate”.
Bernanke’s support may give momentum in Congress to legislation to help the economy after the impact of a $168 billion package in February faded. The Fed chief’s remarks also put him in front of the Bush administration, which until after his testimony had refrained from backing a new effort.
Within an hour of the end of Bernanke’s testimony, White House Press Secretary Dana Perino said officials are “open” to the idea of a new plan and would “look carefully” at suggestions. She said on October 16 that, after discussions about a second stimulus that took place last month, “we didn’t think” the proposals put forward “would help bring money into the economy”.
House Speaker Nancy Pelosi has proposed an initiative of as much as $150 billion after the credit crunch deepened in recent months and the effect of the first stimulus package wore off.
Wisconsin Representative Paul Ryan, the budget panel’s ranking Republican, said in the hearing that the Democratic plan is “bloated” and may balloon the budget deficit to $1 trillion.
Bernanke, under questioning, declined to recommend a size for the package. He said the current “large” deficit is “not totally inappropriate given the nature of the emergency that we’re facing and not totally avoidable given the loss of tax revenues”.
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Possible items that would help include further aid for borrowers to refinance loans, support for Fannie Mae and Freddie Mac funding, loan guarantees, direct lending and tax credits, Bernanke said.
“He wants to minimize the human toll of the crisis,” said Diane Swonk, chief economist at Mesirow Financial Inc in Chicago. “He is falling in step with the likes of Alan Blinder and Larry Summers,” appointees under Democratic President Bill Clinton. Bernanke “has shown a remarkable ability to learn from past mistakes, even his own,” Swonk said.
The plan floated by Pelosi, a California Democrat, includes increased federal spending on unemployment benefits, food stamps, highway-construction projects and aid to cash-strapped state governments. No vote has been set.
“Any fiscal action inevitably involves tradeoffs” that may “burden future generations,” Bernanke said. Yet “with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate.”
Evidence of a recession increased last week, as confidence among Americans fell by the most on record and single-family housing starts hit a 26-year low. Industrial output fell 6 per cent in the third quarter, the most since 1991, and a factory index for the Philadelphia region hit an 18-year low this month.
“The pace of economic activity is likely to be below that of its longer-run potential for several quarters,” Bernanke said in today’s testimony. “The slowing in spending and activity spans most major sectors.”
The Fed lowered its benchmark interest rate a half point on October 8 to 1.5 per cent in an unprecedented coordinated action with other central banks. Traders see about a 46 per cent chance of a half-point cut at or before the Federal Open Market Committee’s October 28-29 meeting, futures prices show. The contracts indicate 100 per cent probability of a quarter-point move.
As the credit crisis intensified into a freeze in early September, the Fed took unprecedented actions — rescuing insurer American International Group Inc with an $85-billion loan, later supplemented by $38 billion of additional credit; backing legislation to spend up to $700 billion on recapitalising banks and buying distressed assets; and setting up a short-term funding backstop for US companies through commercial-paper purchases.
Bernanke indicated he was inclined against widening the commercial-paper backstop to include companies with lower credit ratings, saying it would be “much more difficult” to secure “stronger guarantees” from issuers.
US regulators last week announced fresh efforts to jump-start lending. The Treasury committed $250 billion in taxpayer funds to private banks and the Federal Deposit Insurance Corp extended its insurance to include new debt sold by banks.
“These measures were announced less than a week ago, and, although there have been some encouraging signs, it is too early to assess their full effects,” Bernanke said.
Still, the actions “should help rebuild confidence in the financial system,” Bernanke said. While the rescue legislation was “critical” for helping to contain “damage to the broader economy,” stabilising the financial system “will not quickly eliminate the challenges still faced by the broader economy”, he said.
Business spending may decline further in coming months, and homebuilding may keep contracting into 2009, Bernanke said. Lower commodity prices and the slowing economy “should bring inflation down to levels consistent with price stability”, he said.
Today’s comments echo Bernanke’s warning last week that the economy may be in for a prolonged period of sub-par growth. “A broader economic recovery will not happen right away,” and “economic activity will fall short of potential for a time,” he said in an October 15 speech.
Treasury Secretary Henry Paulson said today that the capital-injection program has enough funds to support every financial company that qualifies.