–All US Policymakers Can Do Is Ensure As Prepared As Possible
–Not Concerned By Slowdown In China; Europe A Greater Concern
–Most of China Slowdown ‘Policy-Induced’
–Again Urges Congress To Act On ‘Fiscal Cliff’, Debt Levels
By Brai Odion-Esene
WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Thursday
said stresses in the financial market stemming from the eurozone debt
and banking crises have reached a point that requires European
authorities to take further “effective steps” to contain the turmoil.
In addition, Bernanke noted during testimony before the Joint
Economic Committee, “there are certainly some signs of global slowdown.”
As examples, he cited Europe, China’s decision Thursday to cut
interest rates, and the slowdown experienced by some emerging markets
economies.
“We are trying to assess how important those are and what
implications they have for the United States,” he said. “All we can do
is prepare for it as best we can.”
With regard to Europe specifically, Bernanke noted that for a
number of reasons, including the Greek elections and concerns about
Spain and Italy, stresses in the global financial markets “have risen
pretty significantly in the recent month or two.”
This financial market stress, Bernanke warned, is now at a point
where “it is important for European leaders to take additional effective
steps to contain the problem.”
Bernanke said if Greece were to leave the eurozone, but the
stresses were to be contained within its borders, then the effects would
likely be “fairly moderate.”
On the other hand, if the financial stresses were to spread more
broadly, it would create a lot of volatility in U.S. financial markets
and banks — who would likely reduce lending, “and would, at a minimum,
tend to slow the economy,” Bernanke said.
The Fed has exchanged in currency swaps with other central banks in
order to relieve the stress in dollar-funding markets, and Bernanke said
the number of times those facilities have been tapped is coming down
“quite significantly.”
The amount of swaps conducted has fallen from a peak of $110
billion to around $20 billion currently, he said. “So their need seems
to be declining.”
Bernanke added that the Fed has worked hard to ensure U.S. banks
and the financial system are resilient to shocks from across the
Atlantic.
“We are taking steps to try to make sure that we are as well
prepared as possible in the financial system,” he said.
At the same time, however, there is not much that can be done by
U.S. policymakers to “attenuate” the problems in Europe, so the focus
should be on being “strong and prepared” here in the United States,
Bernanke said.
There are some steps that Congress can take to protect the economy
from any contagion from Europe, he added.
“The main things that Congress can do, I think, would be to help
strengthen our own economy,” Bernanke said. “The more momentum, the
stronger our economy, the better able we would be to withstand the
financial spillover from problems in Europe.”
Bernanke reiterated that the Fed still has the ability to provide
liquidity against collateral in the event of intense financial stress
and stands ready “to do whatever is necessary to protect our financial
system.”
The Chinese government Thursday agreed to cut benchmark lending and
deposit rates — by 25 basis points effective Friday to 6.31% and 3.25%,
respectively — for the first time since the global financial crisis in
the most aggressive move yet to shore up growth in the face of
rapidly-slowing economic activity.
Bernanke assured lawmakers, however, that Europe is of a greater
concern for U.S. growth prospects than China.
“Part of the slowdown is policy-induced; intentional,” he said,
with China’s goal to slow its economy to a more sustainable pace of
growth.
“So I don’t think the change in Chinese prospects, on net, are
enough to be concerning for the United States,” Bernanke said.
He went on to cite some offsetting factors, such as the fact that
when China’s growth slows oil prices tend to decline — a positive for
the U.S. economy.
Questions about Europe’s woes inevitably veered into a discussion
of the United States’ own fiscal situation and in particular the looming
“fiscal cliff” that the Fed has warned could derail the recovery.
Bernanke called the expiration of the 2001 and 2003 Bush-era tax
cuts “the single biggest item in the fiscal cliff and — if everything
else held constant — would have an adverse effect on spending and
growth in the economy that would be significant.”
He urged Congress to take steps to mitigate the impact of the
fiscal cliff, saying Capitol Hill needs to be thinking “very seriously”
about how to put the federal budget on a long term sustainable path and
not be “complacent.”
Bernanke took issue with the idea that the Fed’s interest rate
policy is in any way enabling fiscal deficits
“The U.S. deficits are so large, particularly going out over the
next few years — irrespective of the level of interest rates — that I
would think Congress would have plenty of motivation to try to address
that,” he said.
The Treasury has said it expects to hit the statutory debt limit at
the end of the year, and then — with the help of some extraordinary
measures — create some breathing room until early 2013.
Bernanke warned lawmakers, however, against a repeat of the
brinksmanship seen last summer that led to a loss of the country’s
prized ‘AAA’ rating, and severely impact both business and consumer
confidence.
“I urge Congress to come to agreement on that well in advance so as
not to push us to the twelfth hour,” he said.
** MNI Washington Bureau: 202-371-2121 **
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