NEW YORK – Although the financial crisis appears “mostly behind us,” with the economy stabilizing and showing some growth, the U.S. faces “daunting” challenges on the economic front, Federal Reserve Board Chairman Ben S. Bernanke said today.
“Today the economy continues to operate well below its potential, which implies that a sharp near-term reduction in our fiscal deficit is probably neither practical nor advisable,” Bernanke told the Dallas Regional Chamber, according to prepared text of his remarks, which were released by the Fed. “However, nothing prevents us from beginning now to develop a credible plan for meeting our long-run fiscal challenges. Indeed, a credible plan that demonstrated a commitment to achieving long-run fiscal sustainability could lead to lower interest rates and more rapid growth in the near term.”
“With the crisis largely behind us, we as a country must now turn to fixing structural weaknesses in the financial system, in particular in the regulatory framework,” Bernanke said. “We need tough new rules to make financial institutions safer and to constrain excessive risk-taking, and we need a regulatory framework that gives the Federal Reserve and other agencies the ability to address risks to the financial system as a whole. Critically, so that we will never again face the unpalatable choice between bailouts and a disorderly bankruptcy that threatens to bring down our financial system, we must bring an end to the belief that some financial institutions are too big to fail. To do that, we urgently need a new resolution regime for large, complex, and interconnected financial firms, similar to that already established for banks. To end too-big-to-fail, the new regime should permit regulators to close a failing firm and impose losses on shareholders and creditors; indeed, I would argue that no financial instrument counted as regulatory capital should be allowed to receive any protection from losses. At the same time, regulators must have the tools necessary to minimize the associated disruption to the financial system and the broader economy.”
Unemployment and foreclosure remain challenges to individuals, while cities and states struggle with lower revenues and bank lending remains weak, threatening the expansion of small businesses.
Bernanke said “economic growth, supported by the Federal Reserve's stimulative monetary policy, will be sufficient to slowly reduce the unemployment rate over the coming year. If economic conditions improve, as I expect, we should see increased optimism among consumers and greater willingness on the part of banks to lend, which in turn should aid the recovery. Meanwhile, for the near term, inflation appears to be well controlled. Productivity improvements have helped firms control costs, and little pricing power is evident. Inflation expectations, as measured in the financial markets or in surveys, appear stable.”
Also, Bernanke warned, the nation must prepare for the demographic changes as the Baby Boom generation begins retiring. “As our population ages, the ratio of working-age Americans to older Americans will fall, which could hold back the long-run prospects for living standards in our country. The aging of the population also will have a major impact on the federal budget, most dramatically on the Social Security and Medicare programs, particularly if the cost of health care continues to rise at its historical rate.”
He added, “To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.” Bernanke warned these decisions should not be put off.
