WASHINGTON (MNI) – The following is the second and final part of
the full text of testimony by Federal Reserve Chairman Ben Bernanke
Wednesday before the House Budget Committee:
U.S. financial markets have been roiled in recent weeks by these
developments, which have triggered a reduction in demand for risky
assets: Broad equity market indexes have declined, and implied
volatility has risen considerably. Treasury yields have fallen as much
as 50 basis points since late April, primarily as a result of safe-haven
flows that boosted the demand for Treasury securities. Corporate spreads
have widened over the same period, and some issuance of corporate bonds
has been postponed, especially by speculative-grade issuers.
In response to these concerns, European leaders have put in place a
number of strong measures. Countries under stress have committed to
address their fiscal problems. A major assistance package has been
established jointly by the European Union (EU) and the International
Monetary Fund (IMF) for Greece. To backstop near-term financing needs of
its members more generally, the EU has established a European Financial
Stabilization Mechanism with up to 500 billion euros in funding, which
could be used in tandem with significant bilateral support from the IMF.
EU leaders are also discussing proposals to tighten surveillance of
members’ fiscal performance and improve the design of the EU’s fiscal
support mechanisms.
In addition, to address strains in European financial markets, the
European Central Bank (ECB) has begun purchasing debt securities in
markets that it sees as malfunctioning, and has resumed auctions of
three- and six-month loans of euros in unlimited quantities to borrowers
with appropriate collateral. To help ease strains in U.S. dollar funding
markets, the Federal Reserve has reestablished temporary U.S. dollar
liquidity swap lines with the ECB and other major central banks. To
date, drawings under these swap lines remain quite limited and far below
their peaks reached at the height of the financial crisis in late 2008,
but they are nevertheless providing an important backstop for the
functioning of dollar funding markets. More generally, our ongoing
international cooperation sends an important signal to global financial
markets that we will take the actions necessary to ensure stability and
continued economic recovery.
The actions taken by European leaders represent a firm commitment
to resolve the prevailing stresses and restore market confidence and
stability. If markets continue to stabilize, then the effects of the
crisis on economic growth in the United States seem likely to be modest.
Although the recent fall in equity prices and weaker economic prospects
in Europe will leave some imprint on the U.S. economy, offsetting
factors include declines in interest rates on Treasury bonds and home
mortgages as well as lower prices for oil and some other globally traded
commodities. The Federal Reserve will remain highly attentive to
developments abroad and to their potential effects on the U.S. economy.
Fiscal Sustainability
Ongoing developments in Europe point to the importance of
maintaining sound government finances. In many ways, the United States
enjoys a uniquely favored position. Our economy is large, diversified,
and flexible; our financial markets are deep and liquid; and, as I have
mentioned, in the midst of financial turmoil, global investors have
viewed Treasury securities as a safe haven. Nevertheless, history makes
clear that failure to achieve fiscal sustainability will, over time, sap
the nation’s economic vitality, reduce our living standards, and greatly
increase the risk of economic and financial instability.
Our nation’s fiscal position has deteriorated appreciably since the
onset of the financial crisis and the recession. The exceptional
increase in the deficit has in large part reflected the effects of the
weak economy on tax revenues and spending, along with the necessary
policy actions taken to ease the recession and steady financial markets.
As the economy and financial markets continue to recover, and as the
actions taken to provide economic stimulus and promote financial
stability are phased out, the budget deficit should narrow over the next
few years.
Even after economic and financial conditions have returned to
normal, however, in the absence of further policy actions, the federal
budget appears to be on an unsustainable path. A variety of projections
that extrapolate current policies and make plausible assumptions about
the future evolution of the economy show a structural budget gap that is
both large relative to the size of the economy and increasing over time.
Among the primary forces putting upward pressure on the deficit is
the aging of the U.S. population, as the number of persons expected to
be working and paying taxes into various programs is rising more slowly
than the number of persons projected to receive benefits. Notably, this
year about 5 individuals are between the ages of 20 and 64 for each
person aged 65 or older. By the time most of the baby boomers have
retired in 2030, this ratio is projected to have declined to around 3.
In addition, government expenditures on health care for both retirees
and non-retirees have continued to rise rapidly as increases in the
costs of care have exceeded increases in incomes. To avoid sharp,
disruptive shifts in spending programs and tax policies in the future,
and to retain the confidence of the public and the markets, we should be
planning now how we will meet these looming budgetary challenges.
Achieving long-term fiscal sustainability will be difficult. But
unless we as a nation make a strong commitment to fiscal responsibility,
in the longer run, we will have neither financial stability nor healthy
economic growth.
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** Market News International Washington Bureau: 202-371-2121 **
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