NEW YORK – Although the financial crisis seems to be history and the economy is stable, there is considerably more recovery needed, Federal Reserve Board Chairman Ben S. Bernanke said Monday.
“Our nation has endured a deep recession that in turn was triggered by the most severe financial crisis since the Great Depression. Today, the financial crisis appears to be mostly behind us, and the economy seems to have stabilized and is expanding again,” Bernanke told the Southern Legislative Conference of the Council of State Governments, according to prepared remarks released by the Fed. “But we have a considerable way to go to achieve a full recovery in our economy, and many Americans are still grappling with unemployment, foreclosure, and lost savings.”
Falling tax revenues have battered budgets on the state and local level, and many states and localities “continue to face difficulties in maintaining essential services and have significantly cut their programs and work forces,” he added. “These cuts have imposed hardships in local jurisdictions around the country and are also part of the reason for the sluggishness of the national recovery.”
Moderate economic expansion was aided by stimulative fiscal policies and firms' restocking of their inventories, which will diminish over time, and by rising demand from households and businesses, which should help sustain growth, he said.
Bernanke expects consumer spending to accelerate in the future, as incomes and credit conditions rise. Business spending has been spurred by outlays deferred during the downturn and the need to replace aging equipment.
But, he reminded, housing continues to restrain the economy, and tight credit and the sagging economy restrain commercial real estate. Also, the weak jobs market and high unemployment levels are holding back recovery.
Another factor proving to be a barrier to economic recovery is the situation in Greece.
While banks are recovering, “many banks continue to have a large volume of troubled loans, and bank lending standards remain tight.”
Bernanke advocated reserve or “rainy day” funds for states, whose budgets are vulnerable to business-cycle downturns.
“In principle, some smoothing of state government expenditures over time could take place through the capital budget,” he said. “Maintaining or even increasing the pace of infrastructure construction when the economy is weak fosters economic development and provides local jobs, and it may even allow the state to get more bang for the buck because of increased competition among private contractors when demand is slack. However, voters and policymakers may understandably be reluctant to approve new bond issues and take on additional costs for debt payments in a period of fiscal and economic stress.”
Investing in people, especially to boost their knowledge and skills, is vital to a thriving economy, Bernanke added. “In a dynamic economy in which job requirements are constantly changing, individuals already in the workforce need opportunities to improve their skills throughout their lives.”
Again, Bernanke warned of the looming crisis as baby boomer retire. “In addition to pensions, states will have to address the burgeoning cost of retiree health benefits. Estimates of these liabilities are subject to significant uncertainty, largely because we have little basis on which to project health-care costs decades into the future.”
