Bernanke Testimony March 3

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MARCH 3, 2009


GREGG: Thank you, Senator Wyden.

And thank you, Mr. Chairman, for attending this hearing today.

I think Senator Wyden, as acting chairman, has touched a core of one of the primary issues I’m interested in, which is the question of confidence. Whether or not the economy recovers depends in large part on the confidence of the American people in the value of their homes and in the fact that they’ll keep the job, confidence of those people
who buy our instruments that are debt is solid and sound, confidence that our currency is strong.

Wrong. It depends on having sufficient income to buy their own outputs and to net save as desired.

In the short run, one can accept the fact that debt is going to go up significantly because of the need to address this economy with the liquidity that only the government can put into it.

But in the long run, one has to ask how can this country sustain a debt to GDP ratio of 67 percent, deficits of over 3 percent, or as far as the eye can see, and expect to maintain the value of the dollar or the ability of people to come and buy our debt?

Like Japan? The yen seems strong enough to me with ratios twice that high.

There is a tsunami of debt headed at us — $66 trillion in unfunded liability. It will essentially overwhelm the capacity of our children to pay it and the ability of this nation to sustain it.

The usual mainstream nonsense.

BERNANKE: By December the Federal Open Market Committee had brought its target for the federal funds rate to an historically low range of zero to .25 percent, where it remains today.

(Which has removed maybe $200 billion annually in net interest income for the non government sectors)


Here we go. Deficits per se are bad.

the spending for financial stabilization, the increases in spending and reductions in taxes associated with the fiscal package, and the losses in revenues and increases in income- support payments associated with the weak economy will widen the federal budget deficit substantially this year. Taking into account these factors, the administration recently submitted a proposed budget that projects the federal deficit to increase to about $1.8 trillion this fiscal year and to remain around $1 trillion in 2010 and 2011.

As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to more than 60 percent over the next several years, its highest level since the early 1950s, in the years following the massive debt buildup
during World War II.

Of course, all else equal, this is a development that all of us would have preferred to avoid.

He’s obviously in a fixed FX paradigm

We are better off moving aggressively today to solve our economic problems. The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation,

As if that’s the larger issue

but would also imply lower output, employment and incomes for an extended period.

Of secondary importance to the deficit issue.

With such large near-term deficits, it may seem too early to be contemplating the necessary return to fiscal sustainability. To the contrary, maintaining the confidence of the financial markets requires that we begin planning now for the restoration of fiscal balance.

Not true.

As the economy recovers and resources become more fully employed, we will need to withdraw the temporary components of the fiscal stimulus. Spending on financial stabilization also must wind down. If all goes well, the disposition of assets acquired by the Treasury in the process of stabilization will be a source of added revenue for the Treasury in the out years.

How about instead:

Whatever it takes to sustain output and employment is the right fiscal and policy.

Determining the pace of fiscal normalization will entail some difficult judgments. In particular, the Congress will need to weigh the costs of running large budget deficits for a time

What costs?

against the possibility of a premature removal of fiscal stimulus that could blunt the recovery.

That’s a real cost.

We at the Federal Reserve will face similar difficult judgment calls regarding monetary policy.

In particular, policy-makers must remain prepared to take the actions necessary in the near term to restore stability to the financial system and to put the economy on a sustainable path to recovery. But the near-term imperative of achieving economic recovery and the longer-run desire to achieve programmatic objectives should not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances.

Why are they imbalances???

There are no gold reserves that can be depleted due to a convertible currency.

Without fiscal sustainability,

Fortunately, that isn’t an operational issue.

in the longer term we will have neither financial stability nor healthy economic growth.

Thank you for your attention. I’m happy to take your questions.

Senator Gregg?

GREGG: Thank you, Mr. Chairman.

And after that is all said and done, four years from now, when one certainly hopes, presumes and expects that we will be beyond these dire economic situations, we will be looking at a government which is taking up 22 percent of the gross national product,

(Probably the lowest in the world)

has a 67 percent ratio of publicly held debt to the GDP, and no end in sight and, in fact, it continues to work its way up, with deficits running at three to four percent, minimum, from 2013 to 2019, which is the end of the
window for this budget.

Reads like conditions for stability to me.

BERNANKE:GREGG: But your place is to protect the value of the dollar and protect the ability …

GREGG: … to sell the debt…

BERNANKE: … go on to say my concern here, as I expressed, was that there needs to be fiscal sustainability. If government spending is higher, it needs to be recognized that that will involve higher taxes in order to maintain a close reasonable balance between revenue and outlays.

So his target is a ‘close reasonable balance’.

That does have some implications for efficiency of the economy.

Does have some implications for efficiency? Is that all? Not that there is such a thing in the first place.

BERNANKE: Well, Senator, the CBO, for example, has done simulations which show that in 2030, under current laws, Medicare, Medicaid and Social Security would take up about, alone, would take up about 16 percent of GDP, which is pretty close to non-interest spending. It’s pretty close to the entire federal non-interest budget.

So it’s clear that in order to get control over the overall budget situation, we’re going to need to look at entitlements.

We don’t have the real resources to give the elderly a modest minimum standard of living and we don’t have the real resources to look after our health???

The current excess capacity alone is more than enough to do both.

If we don’t get a sustainable fiscal situation and deficits continue in large amounts for a long period, then it will become more difficult to sell our debt and interest rates will rise and it will be counterproductive.

Like Japan?

BERNANKE:Yes. So there’s been a lot of talk about banks and their ability to lend. In fact, for many types of credit, nonbank securitization markets are the main source of funding and those markets have largely closed down.

And so by restoring and re-stimulating activity in securitization markets, we hope to get credit flowing for a number of different critical areas.

We can’t ‘get credit going’ without securitization?

Of course we can!

The Fed could easily enable the banks, their legally designated agents, to do this with similar funding and guarantees.

Senator Cardin?

GRAHAM: Thank you, Mr. Chairman.

I’m trying to ask Senator Gregg’s question a little bit differently. Is there any outer limit on the federal government’s ability to borrow money?

BERNANKE: Certainly, there are outer limits.


GRAHAM: What are they and how close are we to them?

BERNANKE:Well, it’s — it’s hard — it’s hard to — to judge in any kind of explicit way, since we don’t — don’t know. I mean there are countries have clearly — for short periods of time has clearly had very high levels of debt.

Like Japan? For almost 20 years?

The United States had more than 100 percent debt to GDP ratio during World War II. The Japanese during their financial crisis raised the debt to GDP ratio above 100 percent.

Above 150% for considerable periods of time.

But clearly, that’s not a healthy situation.


It’s one in which interest payments can become a very important part of the — of the government’s outlays.

The Fed sets those interest rates. And Congress taxes interest income.

Nor operationally is the ability to make payments revenue constrained.

We had been — over years had been bringing our debt to GDP ratio down to about 40 percent. Now we’re going to see a jump to 60 or 65 percent.

We need to be I think looking for a — what’s called a primary deficit — that is, the deficit excluding interest payments, a somewhere close to balance. That would be sufficient to stabilize our debt to GDP ratio. I think that would be a good objective.

Interesting, more gold standard rhetoric.

How about an objective like optimal output and employment?

It’s very hard to know how much higher — how much higher the debt to GDP ratio could be before the international financial markets begin to — to balk. And so I think the prudent thing to do is to try and maintain stability of the debt to GDP ratio.

Like Japan, where 10 year JGB’s are under 1.5%, outstanding securities are over 150% of GDP, deficits range to over 8% of GDP, and they’ve been downgraded below Botswana???

Government rates go to where the CB sets them, end of story.

GRAHAM: Has there always been a buffer zone to — between reality and this magical place? And is there a buffer zone today?

BERNANKE: Well, as — as I think the recent experience is showing, confidence and expectations are critical.

Yes, he truly believes this.

And I think the markets will be quite able to absorb, for example, the large amount of issuance we’re seeing in the next couple of years, if there is a reasonable expectation and confidence in the same markets that the United States is serious about getting its budget position under control in the longer-term.

He truly believes that’s the case.

GRAHAM: There are some projections that exist that in 2050 the debt to GDP will be 300 percent. What kind of effect will that have, if that became a reality?

BERNANKE: Well, I don’t think that’s going to happen. It can’t happen, because things would break down before then.

GRAHAM: Something has to change first.

BERNANKE: Something…

GREGG: Happen, but not to change.

BERNANKE:That’s right.

GREGG: For it not to happen, right? Something has to change.

BERNANKE: Something would change, whether it was either change in policy or change in the willingness of the — of the lenders to finance the debt.

What generally changes is inflation keeps the nominal debt to GDP ratio down, but that’s another story that he knows well. And the reason he doesn’t want to go there is because that story says the risks are inflation and not solvency or the ability to sell securities.

GRAHAM: I’ve only got 15 seconds. My question, basically, is will we ever know in this country whether or not we’re repeating the Japanese mistake? Do you have any test out there to let us in Congress know that we’re throwing good money after bad, when it comes to certain institutions?

BERNANKE: The Japanese mistake was not acting quickly enough or aggressively enough, and I think that’s not our problem.

Yes, on fiscal policy.

SANDERS: Thank you, Mr. Chairman.

ALEXANDER: But — but they are (inaudible) to — to specify — the first risk is that you don’t get your money back. You think you will. The second risk would be that you’d — the more paper — the more money you print, the more likely we have inflation down the road…


BERNANKE: Senator, that’s aptly correct. So you’re absolutely right that in order for us to begin to raise interest rates and begin to stabilize the economy.

Now that they can pay interest on reserves they don’t have to ‘shrink the balance sheet’ to raise rates. Bernanke should know that.

At that time when the economy begins to grow again, we’re going to have to shrink the balance sheet and we are very comfortable — we’re watching that very, very carefully. It’s very important. We spend about half of our time at FOMC meetings, looking at the balance sheet and trying to make that evaluation.

Interesting use of FOMC time!

Worrying about something of no consequence whatsoever.