Bernanke: Stimulus Alone Is Not Enoughby Tim Manni
Federal Reserve Chairman Ben Bernanke delivered a speech today at the London School of Economics on “The Crisis and the Policy Response.” Mr. Bernanke argued that the president elect’s stimulus package alone would not be enough to facilitate an economic recovery.
“In my view, however, fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system. History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively,” said Bernanke.
Bernanke touched upon several “strong measures” — both new strategies and past practices — that will allow policy makers the ability “to communicate to their constituencies why financial stabilization is essential for economic recovery and is therefore in the broader public interest.”
“Consequently, more capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.”
“Should the Treasury decide to supplement injections of capital by removing troubled assets from institutions’ balance sheets, as was initially proposed for the U.S. financial rescue plan, several approaches might be considered.”
“In addition, efforts to reduce preventable foreclosures, among other benefits, could strengthen the housing market and reduce mortgage losses, thereby increasing financial stability.”
Bernanke also stressed the importance of both short and long-term improvement, stronger supervision and regulation, the need for international oversight, and a re-examination of financial institutions once deemed “too big to fail:”
“It is unacceptable that large firms that the government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period.”
While these types of speeches do not usually announce a new policy, they do reveal new strategies. Especially if another $350 billion is released by Congress, federal officials have recognized that not only must they do things differently, they need to do more.
What should policymakers focus on as their main strategy when moving forward?