May 12, 2011
For all his new emphasis on transparency at the Federal Reserve Board, chairman Ben Bernanke remains reluctant to step into the political arena, especially when it comes to highly charged issues like the impact of the deficit on the economy or whether jobs were created by President Obama’s stimulus plan.
But the former Princeton University economics professor waded into the big muddy Thursday by flatly rejecting assertions by House Speaker John Boehner, made during his speech to Wall Street executives on Monday night, that excessive government borrowing was crowding out private investment and the $787 billion stimulus package enacted shortly after Obama entered office had retarded job development in the private sector.
“I don’t think there is any crowding out,” Bernanke said in response to a question raised by Sen. Charles Schumer, D-N.Y., during a Senate Banking hearing. “Interest rates are quite low and there are plenty of resources available for hiring new workers.”
Bernanke immediately repeated his position on the debt that he has articulated many times in the past. The government needs to adopt a long-term plan to lower the $1.5 trillion annual budget deficit, even if the short-run effects of borrowing remained a net positive for the economy. “If we had a long-term plan to address the deficit,” he said, “it could lower interest rates.”
Schumer, smiling broadly, slipped his reading glasses a bit further down his nose. “Do you think the stimulus plan hurt job creation?” he asked, citing a Congressional Budget Office analysis that had indicated the stimulus gave a significant boost to the economy. The February 2011 CBO report on the economic impact of the American Recovery and Reinvestment Act estimated that the spending added anywhere from 1.1 to 3.5 percent to overall economic activity; reduced the unemployment rate by 0.7 to 1.9 percent; increased the number of people employed between 1.3 million and 3.5 million; and created anywhere from 1.8 to 5.0 million jobs.
“The CBO analysis is a reasonable analysis,” Bernanke said. “My best guess is that the stimulus increased employment.”
By that point, all the Republicans on the banking committee had left the room for a meeting with President Obama at the White House to discuss ways to raise the debt ceiling, which officially gets reached sometime next week. Treasury Secretary Timothy Geithner has announced that various financing maneuvers can postpone the date when the U.S. must begin either drastic cuts in spending or default on its debts until early August.
But before the Republican lawmakers left, Sen. Richard Shelby of Alabama, the ranking Republican member of the committee, warned Bernanke and the other members of the Financial Stability Oversight Council arrayed across the front of the room that they should go slow in adopting rules that would deem some financial and non-financial institutions as posing a potential systemic risk to the economy and therefore need to be subject to special regulatory scrutiny. “Before regulators move forward, they will need to devise a well-considered and transparent regulatory scheme that limits adverse consequences,” Shelby said.
Members of the oversight council present at the hearing included Deputy Treasury Secretary Neal Wolin, Federal Deposit Insurance Corp. chairwoman Sheila Bair, Securities and Exchange Commission chairwoman Mary Schapiro, Commodity Futures Trading Commission chairman Gary Gensler and Acting Comptroller of the Currency John Walsh
The Treasury issued rules in January that defined what institutions it will consider Systemically Important Financial Institutions (SIFIs). The rules will subject those institutions, even if they are not banks like insurer AIG, to heightened supervision by the Federal Reserve Board. They will also be required to submit detailed “resolution plans,” which Bernanke dubbed living wills, in case they enter bankruptcy or run into severe financial distress.
Shelby, in his prepared comments, echoed conservative economists when he complained that the designation will create a moral hazard in that the government will have essentially labeled them as too big to fail. That would in turn translate into an unfair competitive advantage in the marketplace, since it could lower their cost of capital, whether through borrowing or when raising equity. The assumption there is that investors would assume these institutions would eventually be backed by the government.
Not so, replied Bair in her prepared testimony, since the companies designated as SIFIs would face tougher rules and higher capital requirements. “In light of these significant regulatory requirements, the FDIC has detected absolutely no interest on the part of any financial institution in being named a SIFI,” she said. “Indeed, many institutions are vigorously lobbying against such a designation.”
Sen. Patrick Toomey, R-Pa., complained that the January rule merely repeated the statute and “didn’t tell us how it would be applied.” He asked the Treasury Department to publish a more specific rule and open another 60-day comment period for the public. Wolin said the Treasury would spell out a guidance for how firms would be designated SIFIs and allow for public comment, although he would not guarantee a 60-day window.
Bernanke warned that whatever shape the final rule and guidance took, there would never be ironclad rules for naming a SIFI. “I don’t think we can come up with an exact formula that doesn’t require . . . some judgment,” he said.
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