Bernanke testimony calls for fiscal responsibility, but contains no surprises

Before you go, we thought you'd like these...
Before you go close icon
Federal Reserve chairman Ben Bernanke's testimony this morning before the House Budget Committee contained no surprises or major revelations.

Bernanke started by pointing out the sad state of the economy:
  • Gross domestic product dropped six percent in the last quarter of 2008 and the first quarter of 2009.
  • Nearly six million jobs were lost since the beginning of 2008; he expects unemployment to rise in the coming months, even after the economy resumes growth.
  • Tight credit conditions, declines in equity and household wealth, and the weak labor market continue to weigh on consumer spending.
However, recent data also suggest that the pace of economic contraction may be slowing, Bernanke said:
  • Consumer spending was flat in 2009 after a sharp decline in the last half of 2008. And the fiscal stimulus program may boost household spending power.
  • Consumer sentiment has improved.
  • The housing market, after a long decline, has shown some signs of bottoming out; home prices have stabilized in recent months, and more significantly to a housing recovery, the backlog of unsold new homes has declined.
  • Businesses are managing to shed unwanted inventories -- a precondition for increasing production.
Given all that, Bernanke expects overall economic activity to bottom out before turning up this year. But he cautions that any recovery would be at a much lower growth rate than the longterm potential. And because of the slack in resources, inflation will likely remain low and even decline compared to 2008.

One big caveat remains, though. "Financial markets and financial institutions remain under stress," despite the Fed's policy actions, he said, "and low asset prices and tight credit conditions continue to restrain economic activity." And any relapse could hinder any recovery efforts.

So after a few pats on the back while he recounted those Federal Reserve programs that have helped the financial markets, Bernanke finally got to his point: to warn about the ever-increasing federal deficit. The White House estimates a $1.8 trillion budget deficit this year.

"Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the Baby Boom generation and continued increases in medical costs," he said. Retirement and Medicare funds could be depleted in a few years.

Yields have risen recently on concerns over the deficit, and that could also hinder Federal Reserve efforts. Yes, politicians face challenges as they address the economic crisis, but "unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth," he said. Bernanke didn't recommend specific actions or cuts.

Just yesterday, Treasury secretary Timothy Geithner tried to assure China, the biggest holder of U.S. debt, that President Obama is committed to tackling the soaring budget deficit.

Well, as the politicians continue to ask questions that are longer than Bernanke's answers, I can't help but get the feeling they completely missed his message: Stop spending!
Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners