“Unless we demonstrate a strong commitment to fiscal sustainability in the
longer term, we will have neither financial stability nor healthy economic
growth,”
Bernanke’s comments signal that the central bank sees risks of a relapse into
financial turmoil even as credit markets show signs of stability. He warned the
financial industry remains under stress and the credit crunch continues to
limit spending.
The budget deficit this year is projected to reach $1.85 trillion, equivalent
to 13 percent of the nation’s economy, according to the nonpartisan
Congressional Budget Office.
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From: 2nd Liner goren...@hotmail.com
To: obrolan-bandar@yahoogroups.com
Sent: Wednesday, June 3, 2009 10:01:48 PM
Subject: [ob] Bernanke Warns Long-Term Deficits Threaten Financial Stability
Bernanke Warns Long-Term Deficits Threaten Financial Stability
By Craig Torres and Brian Faler
June 3 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said large U.S.
budget deficits threaten financial stability and the government can’t continue
indefinitely to borrow at the current rate to finance the shortfall.
“Unless we demonstrate a strong commitment to fiscal sustainability in the
longer term, we will have neither financial stability nor healthy economic
growth,” Bernanke said in testimony to lawmakers today. “Maintaining the
confidence of the financial markets requires that we, as a nation, begin
planning now for the restoration of fiscal balance.”
Bernanke’s comments signal that the central bank sees risks of a relapse into
financial turmoil even as credit markets show signs of stability. He warned the
financial industry remains under stress and the credit crunch continues to
limit spending.
The Fed chief said that deficit concerns are already influencing the prices of
long-term Treasuries. Yields on 10- year notes have climbed since the Fed
announced plans in March to buy $300 billion of long-term government bonds.
“In recent weeks, yields on longer-term Treasury securities and fixed-rate
mortgages have risen,” Bernanke said. “These increases appear to reflect
concerns about large federal deficits but also other causes, including greater
optimism about the economic outlook, a reversal of flight-to-quality flows and
technical factors related to the hedging of mortgage holdings.”
Rising Deficit
The budget deficit this year is projected to reach $1.85 trillion, equivalent
to 13 percent of the nation’s economy, according to the nonpartisan
Congressional Budget Office.
This year’s deficit, four times the size of last year’s shortfall, has been
driven up mostly by costs associated with the financial crisis. An almost $800
billion fiscal stimulus plan, the federal bailout of the financial industry,
the government takeover of Fannie Mae and Freddie Mac along with the increased
costs of running safety-net programs such as unemployment insurance have all
added billions to spending.
President Barack Obama has pledged to halve the deficit by the end of his term.
Yet even if he’s successful, his administration anticipates the government will
still run what would be, by historical standards, large deficits for the
foreseeable future.
Inflation Outlook
The administration projects the deficit will shrink next year to $1.25 trillion
or 8.5 percent of the economy. In 2011, it expects the deficit to shrink
further to $930 billion or 6 percent of GDP.
The administration’ s projections are more optimistic than some independent
observers, who assume the economy will grow more slowly and expenses will pile
up faster than the White House anticipates.
Rising government spending, forecasts for a record fiscal deficit and an
unprecedented expansion of central bank credit have also fueled investor
concerns that inflation will rise. Bernanke said inflation “will remain low” as
the economy operates with slack resource use.
Bernanke said the economy is likely to suffer more “sizable” job losses, which
will weigh on consumer spending. Still, Fed officials are looking for a
recovery in growth later this year as housing demand stabilizes and companies
balance inventories with overall demand.
The central bank is buying as much as $1.75 trillion of housing debt and
Treasuries this year to lower borrowing costs across the economy after reducing
the benchmark interest rate almost to zero in December. Fed officials hold
their next policy meeting June 23-24 in Washington.
Last Updated: June 3, 2009 10:01 EDT
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