main problem "Politicians haven't a clue how to tackle it".
February 24, 2009, 1:20 pm Bernanke Testimony: Fix Which First, Chicken or Egg? In answers to questions from senators today, Federal Reserve Chairman Ben Bernanke stressed the importance of stabilizing the financial system above all else, but debate continues over whether that gets to the heart of the problem.
Bernanke testifies before the Senate on Tuesday. (Landov) “If there’s one message I’d like to leave you, it’s that if we’re going to have a strong recovery, it’s got to be on the back of a stabilization of financial system,” Bernanke said in response to question from Sen. Charles Schumer (D., N.Y.). “And it’s basically black and white. If we stabilize the financial system adequately, we’ll get a reasonable recovery. It might take some time. If we don’t stabilize the financial system, we’re going to founder for some time.”
Bernanke suggested that recovery in other sectors will stem from financial stabilization. Senators singled out housing as an area for concern, but the chairman insisted that the focus must be on the wider economy. “Restoring confidence will be the best thing to get the housing market going again,” he said.
But that raises a chicken-egg question. What needs to be stabilized first, the financial sector or the housing market? One of the key sticking points keeping banks under pressure has been the toxic assets weighing on balance sheets. The government has been trying for months to stabilize these assets, many of which are based on home loans. Action has been largely stymied by difficulties in pricing the instruments as home prices continue declining.
Taking these assets off balance sheets was a key part of the original Troubled Asset Relief Program that was eventually abandoned. There had been some discussion of a government-backed bad bank that would hold the assets, but Treasury Secretary Timothy Geithner’s latest plan calls for a private-public partnership to remove the assets from banks’ balance sheets. But pricing remains a key concern, and some say that it will be impossible until the housing market stabilizes.
Bernanke continued to stress the importance of the housing market. “I would anticipate some stabilization in the housing market going forward,” he said. He added that people are “very reluctant to make commitments to automobiles,” but as confidence returns to the market the auto sector and housing market should improve. “Those areas will begin to strengthen and we’ll see broad-based recovery.”
The chairman sides with the financial sector in the chicken-egg argument, and said that he thinks the Odama administration’s plan as the “best hope” for reviving the economy. If it is successful, the Fed forecasts that the recession will end this year.
However, responding to a question from Sen. Robert Menendez (D., N.J.) Bernanke admitted that most economists’ forecasts have been too optimistic so far in this recession. “Nobody’s record of forecasting this thing has been really good,” he said.
“We can agree on that,” Sen. Menendez stated. –Phil Izzo
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