Bernanke/Geithner: See Higher Energy,Europe Slowing Growth

Author: Market News International | Category: News

–Bernanke: Higher Energy Prices Would Probably Slow Growth In Short-Run

By Brai Odion-Esene

WASHINGTON (MNI) – U.S. Treasury Secretary Timothy Geithner
Wednesday warned that even if Europe’s leaders are successful in
preventing the debt crisis from morphing into a full-blown meltdown,
economic activity on the continent will remain at weak levels, resulting
in slower than expected growth for the United States.

And in testimony alongside Geithner before the House Oversight
Committee, Federal Reserve Chairman Ben Bernanke added that higher
energy prices would probably slow growth in the U.S., at least in the
short run.

The hearing was on Europe’s debt crisis, and the two officials
divided Eurozone member states into two groups, those with “fiscal
space,” and so the time to implement deficit reduction and pro-growth
strategies gradually, and others like Greece, Ireland and Portugal that
have no alternative but to implement tough reforms.

Geithner warned that the risk for the U.S. is a longer period of
weak economic growth in the major economies of Europe.

To compound matters, he said the reality for Europe is that the
crisis will take a long time to work through.

“Realistically … even if Europe is able to be successful in
avoiding a catastrophic financial crisis … the risk is Europe is
still growing, on average, at very weak levels. And that will mean
growth in the United States is weaker than otherwise would be.”

“That’s why it is so important that as they’ve calmed the financial
tensions across Europe, that they are able to shift some of the
attention, some of the focus in Europe to broader strategies that would
make growth stronger across the continent,” Geithner said.

“The position of the United States has generally been that Europe
needs to really step up and do a lot more,” Bernanke added.

Geithner agreed, telling the panel the administration believes
Europe has the means to solve the crisis on its own.

“Our judgment has been … for the IMF to play a modest,
supplemental role alongside the much more dominant role of the European
authorities,” Geithner said.

The world needs to see Europe demonstrate that it is ready to what
it takes to resolve the crisis, he added.

Geithner made clear, as he had before the Financial Services
Committee Tuesday, the administration is not contemplating “and does not
see the case” for requesting additional funds from Congress for the
International Monetary Fund, as it believes the IMF has enough resources
to support the needs of its members.

Bernanke was asked to comment on current high energy prices and
their impact on the recovery.

“Higher energy prices create at least short term inflation
pressures, and moreover they act as attacks on household purchasing
power and reduce consumption spending and that also is a drag on the
economy,” he replied.

“From a purely GDP growth perspective, I think higher energy prices
would probably slow growth, at least in the short run,” Bernanke added.

As for the swap facilities set up to provide dollar funding to the
European Central Bank, Bernanke assured the committee that there is no
credit or foreign exchange risk for the Fed, “while the benefits are
quite significant.”

He said the Fed’s total exposure via its swap facilities —
encompassing funding provided to both the ECB and the Bank of Japan —
is $64 billion.

Bernanke also said the U.S. banking system is better positioned now
to withstand any problem in Europe than it has been since the crisis but
that a “blow up in Europe” would still be costly for the United States.

The banking system is exposed to Europe, Bernanke said, and while
they would suffer large losses in the event of a new crisis in Europe,
the recent stress test of the largest financial institutions found that
all the banks were able to meet “a reasonable level of capital even
following the losses associated with such an event.”

While breaking no new ground on the dollar, Bernanke did say that
the currency will react to interest rates and growth rates in the future
and that the best way to maintain a strong dollar is through the Fed’s
dual mandates of full employment with stable prices and rates.

Fed policies so far, he said, have supported the economy without
damaging the dollar.

Despite the topic of the hearing, ranking member Elijah Cummings
used the opportunity to quiz Geithner on the ongoing struggles of the
U.S. housing market and the Treasury offering Fannie Mae and Freddie Mac
financial incentives for principal write-downs of the mortgages they
hold.

The economy is still suffering a lot of collateral damage from the
financial crisis, Geithner said, and the administration believes it
should so everything it can to help repair and make the economy
stronger.

“There are certain cases where we think there is a pretty strong
economic case for principal reduction as part of a strategy to limit the
future losses to the GSEs,” he said.

“Our job is to try to make sure we are doing everything we can to
reach as many people as we can,” Geithner said.

However, the independent Federal Housing Finance Agency and its
acting Director Ed DeMarco, have resisted any principal writedowns of
the loans guaranteed by the GSEs.

“We have been having discussions with him about how to narrow the
differences between us. But he will have to make these choices,”
Geithner said.

Geithner told the committee what he said Tuesday to the House
Financial Services panel, that he expects to hear more from the FHFA in
about two weeks on the subject.

Both Bernanke and Geithner also agreed the foreclosure process
takes too long and, in Bernanke’s words, “delay for the sake of delay is
not helpful.”

** MNI Washington Bureau: 202-371-2121 **

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