WORLD> America
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WORLD> America
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Bernanke: Economic weakness to continue
(Agencies)
Updated: 2008-12-02 08:28 "Such programs are promising because they sidestep banks and primary dealers to provide liquidity directly to borrowers or investors in key credit markets," Bernanke said. But there is a downside to all of the Fed's programs. Fed lending has ballooned. Bernanke said that the central bank's balance sheet will need to be brought back to a sustainable level in the future. The government does not want financial institutions to become reliant on the Fed for liquidity, and an enormous balance sheet could result in high inflation down the road. "That is an issue for the future," Bernanke said. "For now, the goal of policy must be to support financial markets and the economy." Though some economists believe the Fed is lending recklessly, others say the current problems merit unconventional solutions. "The worry for now is too little inflation, not too much," said Gramley. "They'll face problems when this is over, but nowhere near what they're facing now." Bernanke said the US economy will be slow to recover, as the economic cycle needs to play out, allowing the housing market to correct and the the economy to rebound from a recession. Still, he noted the long-term economic outlook remains strong. He said President-elect Barack Obama's proposed stimulus package could help, and the government's current liquidity programs could bring about a faster recovery. "Both monetary and fiscal policy are working together to prevent a depression," said Gramley. "The Fed isn't going to sit idly by and let that happen again." Learning from history Some economists have accused Bernanke and the Fed of trying to do too much, risking taxpayer money on companies that they should have let fail. But Bernanke, a scholar on the Great Depression, said the Fed has learned from errors policymakers made in that era. "So what we have tried to do, in contrast, is be aggressive as possible, to use all the tools we have to try to stabilize the financial system, to try and prevent the system from - from breaking down," he said. He noted the Fed made two critical mistakes in the 1930s - maintaining overly tight monetary policy and allowing the financial system to collapse. As a result, the Fed proactively reduced rates from 5.25% in September 2007 to its current historic low and injected unprecedented amounts of liquidity into the financial system. "I may make my own mistakes, but I don't want to make somebody else's mistakes," he added. "And I've tried to learn that from the historical experience." |
