–Retransmitting Story Published 15:31 ET Thursday
–Bernanke’s QE3 View Swamped By Congress’ Fiscal Forebodings
–“Main Message” is Fed Not Proposing to Undertake QE3
By Denny Gulino
WASHINGTON (MNI) – The deep concern of senators over the deepening
debt limit crisis Thursday shoved aside all but brief discussion of any
QE3 as Federal Reserve Chairman Ben Bernanke repeatedly warned of the
“calamitous” outcome of default.
But he made clear the Fed is “not prepared” at this point to embark
on any renewed quantitative easing.
Bernanke’s views on Italy and Spain — not in nearly as bad a shape
as Greece but potentially needing their own European bailout — also
punctuated the hours of criticism senators heaped upon their own
institution, opposite parties, alleged Fed enabling and other factors in
the latest crisis.
Sen. Bob Corker, a Republican member of the committee, aimed his
ire directly at Bernanke, saying Fed activism is a “turnoff” and that
he’s moving to the camp of “clipping the Fed’s wings.”
Whether treated as a hero by some, a villain by other senators or
just the dispassionate academic reeling off the list of extremely
unpleasant realities, Bernanke maintained his composure while finding
new ways to describe the fiscal “chaos” that could be only 19 days away.
The context of the hearing, the second in Bernanke’s semiannual
report to Congress, were reports overnight from both sides in the White
House debt talks of new rancor, a president described by some as walking
out, and the fresh warnings from ratings agencies that even the
proximity of potential default could trigger downgrades.
As to any QE3, Bernanke said “it’s more complicated” now than when
signs were clear that QE1 and QE2 were necessary. “Today the situation
is more complex,” Bernanke said, answering questions of Senate Banking
Committee Chairman Tim Johnson. “Inflation is higher. Inflation
expectations are close to our target; we are uncertain about the
near-term developments in the economy.”
“We’re not prepared at this point to take further action,” he said.
“Now you may be entirely correct a) that it might not be needed,
and b) that it might not be particularly effective given the
configuration of the problems that we have,” Bernanke said of any QE3.
“If the problems really arise from the public sectors that are not
responsive to interest rates,” he said it would be one example of what
could raise the question of implementing a QE3.
“So those are certain things we take into account. Now we are not
proposing anything today,” he said.
Bernanke’s Thursday emphasis that no additional easing is now in
prospect, while not strictly in contradiction, nevertheless seemed
somewhat at odds with Wednesday’s testimony in which he described “ways
we could ease further, if needed,” and in his repeated statement, “We
would be prepared to take additional action, obviously, if conditions
warranted.” Words like that led to many observations he had been
expressing a bias toward further ease.
“The Federal Reserve has a mandate and we want to meet that
mandate,” he continued Thursday. “And to do that we just want to make
sure that we have the options when they become necessary. But at this
point we’re not proposing to undertake that option.”
In the more than two hours of his appearance, Bernanke found many
ways to say that as threatening is inaction by the Aug. 2 deadline to
raise Treasury’s borrowing authority to avoid default, equally important
is to use the opportunity to set as comprehensive as possible a
long-term plan to narrow the government’s annual deficits. On Wednesday
he had said he had been “excited” by the possibility of a “grand
bargain” in the $4 trillion neighborhood
“We have to be looking at both the short run and the long run at
the same time,” he said. “The Congress and the administration are
currently looking to make major changes in our spending, deficit
projections over the next decade or so. I think that’s extremely
important that we bring down our deficits.”
“I only ask or suggest,” he continued, “that as Congress looks at
the timing and composition of its changes in the budget that it does
take into account that in the very near term that the recovery is still
rather fragile and that sharp and excessive cuts in the very short term
would be potentially damaging.”
Housing kept coming up in Bernanke’s answers as the “epicenter” of
the economy’s weakness. Because there is, he said, the “big overhang of
distressed sales, open vacant homes, foreclosed homes which are weighing
on prices and creating a vicious circle where people don’t want to buy
because prices are falling and prices are falling because people don’t
want to buy.”
“Fannie, Freddie and the banks own about half a million homes right
now which are basically sitting there on the market and which are
pressing down prices and reducing appraisals and making the housing
market much weaker than it otherwise would be,” he said. “The housing
market is really, in some sense, the epicenter of the problem we have at
the moment.”
Any default by Greece he said, would not directly threaten U.S.
financial institutions because of their relatively meager exposure to
that nation’s debt, but indirect and greater damage would be possible as
the global economy is roiled by the news.
Italy and Spain are not in nearly as bad fiscal shape as Greece, he
said. “It’s true that Italy has a very high debt-to-GDP ratio but it has
some strengths,” he said. “Notably it currently has a primary surplus”
excluding interest, “so its fiscal position is in terms of the current
deficit is much better than Greece.”
Italy’s banks “are in decent shape,” he went on. “They have taken
some extra capital in recently. It’s got a well diversified
manufacturing based economy — so there are a lot of strengths,” he
continued. “So I think the first line of defense there will be for
perhaps, from assistance or commitments whatever from the Europeans,
would be for Italy to try and address, you know, the concerns that the
markets have.”
If Spain or Italy need bailing out though — “I don’t anticipate
that happening” — “I think the Europeans would have to make a very
substantial contribution to stabilize those countries,” he said.
Though several U.S. states bear close watching, their fiscal
problems are not on the scale of some sovereigns, he said. “We don’t see
any immediate risk there but it is true that a number of states do need
to be thinking about their longer-term sustainability given the unfunded
liabilities they may have for state pensions and for, in some cases,
health care programs.”
Most of the committee’s time was spent on the single subject, the
risk of default and the damage it could cause. Bernanke said there is
no way the Fed can offset the effects of any default through purchases
of defaulted Treasuries.
“I don’t think that our policy would prevent a loss of confidence
if creditors lost confidence in the Treasury, which would drive up
interest rates,” he said. “It hasn’t happened yet. But I don’t think
it’s because of us. I think it’s because people still think that they
have confidence in our government’s ability to make its payments.”
Prompted by committee member after member to sketch the dark side
of default, Bernanke obliged. “I think it would be a calamitous
outcome,” he said. “It would have effects not only on the U.S. economy
but on the global economy.”
He continued, “Treasury securities are critical to the entire
financial system. They are used in many different ways, for example for
collateral” and “default on those securities would throw the financial
system potentially into chaos.”
What he said “would certainly be the case is that we would destroy
the trust and confidence that global investors have in U.S. Treasury
securities in being the safest and most liquid assets in the world.”
That, he said, “is a tremendous asset to the United States, the
quality and reputation of our Treasury securities, and we benefit from
it with low interest rates.” A default, he said, would be a “self
inflicted wound.”
“I would urge Congress to take every step possible to avoid
defaulting on the debt,” Bernanke said.
** Market News International Washington Bureau: 202-371-2121 **
[TOPICS: MAUDS$]
