Interest Rate Roundup

Monday, October 20, 2008

More Bernanke talk

Fed Chairman Ben Bernanke, along with Treasury Secretary Henry Paulson, have been speaking so often and in so many venues, that prepared testimony isn't as big a deal as in the past. (An aside: Why can't I get this song out of my head?) But if you're a glutton for punishment, here is Bernanke's latest commentary on the credit markets and the economy, delivered before the House Budget Committee today.

If there is something new in the testimony, it's the part focused on any potential fiscal stimulus package. Here is what Bernanke had to say on that front:

"I understand that the Congress is evaluating the desirability of a second fiscal package. Any fiscal action inevitably involves tradeoffs, not only among current needs and objectives but also -- because commitments of resources today can burden future generations and constrain future policy options -- between the present and the future. Such tradeoffs inevitably involve value judgments that can properly be made only by our elected officials. Moreover, with the outlook exceptionally uncertain, the optimal timing, scale, and composition of any fiscal package are unclear. All that being said, with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate.

"Should the Congress choose to undertake fiscal action, certain design principles may be helpful. To best achieve its goals, any fiscal package should be structured so that its peak effects on aggregate spending and economic activity are felt when they are most needed, namely, during the period in which economic activity would otherwise be expected to be weak. Any fiscal package should be well-targeted, in the sense of attempting to maximize the beneficial effects on spending and activity per dollar of increased federal expenditure or lost revenue; at the same time, it should go without saying that the Congress must be vigilant in ensuring that any allocated funds are used effectively and responsibly. Any program should be designed, to the extent possible, to limit longer-term effects on the federal government's structural budget deficit.

"Finally, in the ideal case, a fiscal package would not only boost overall spending and economic activity but would also be aimed at redressing specific factors that have the potential to extend or deepen the economic slowdown. As I discussed earlier, the extraordinary tightening in credit conditions has played a central role in the slowdown thus far and could be an important factor delaying the recovery. If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, homebuyers, businesses, and other borrowers. Such actions might be particularly effective at promoting economic growth and job creation."

By the way, it's worth noting that certain credit stress indicators -- LIBOR rates, the TED spread, swap spreads, etc. -- have calmed down a bit in the past few days. We'll have to see if that improvement turns out to be longer-lasting, or just another temporary turnaround that fails to stick.


  • Mike, you have been very astute on your analyses leading up to this crisis. The ongoing debate is whether we are looking at deflation or inflation as a result of proposed remedies. While acknowledging this crisis is of monumental proportions, it appears to be your belief that the outcome will be deflationary; presumably because you believe there is not enough "firepower" or will power in the governing bodies to effectively reflate the burst asset bubble; as well as a slowing global economy.

    It seems to me, however, that the only effective policy tool available is to try to inflate our way out of a globally crushing debt burden.

    I believe asking the question of whether policy makers could allow, or could the global economic system tolerate a deflationary environment tolerate such an environment will lead one to the conclusion that policy makers will do everything under the sun to prevent deflation. If not, the already crushing debt burdens become that much more severe. A deflationary environment would turn would turn into an global economic death spiral. This would increase the real value and carrying cost of the debt burden.

    In contrast, considering the impact of an inflationary, even hyperinflationary, environment would effectively lower the real value and cost of the debt carry; as long as incomes inflated as well as prices.

    By Anonymous Anonymous, at October 21, 2008 at 8:39 PM  

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