Bernanke: Feds Have Tools They Need to Cope with Crisis

On a day that has so far brought somewhat of a lull in the federal government’s efforts to avoid being remembered as the people who brought you “1929: The Sequel,” many eyes were on Federal Reserve chairman Ben Bernanke, who appeared on ABC’s “Good Morning America” and later spoke to The Economic Club of New York. In concisely summarizing to the latter the federal government’s actions over the past few weeks, Bernanke (pictured) struck a measured but confident tone, certainly not implying that the crisis is past the worst, but emphasizing that the government has the tools it needs to deal with the problems and is “well positioned to move forward.” Although the current situation “has many novel aspects” and is significantly different from the one that launched the Great Depression, Bernanke said, it resembles past crises at least in causing a major loss of confidence and trust. He also pointed out that government was often slow to act in the past, with the Hoover administration failing for more than three years to intervene in the financial markets. “That is not the situation we face today,” he said. Although the Fed still vastly favors market-based solutions to troubled companies, Bernanke said, the government will intervene “forcefully and without hesitation” when there is “an unacceptable risk to the financial system as a whole.” He recapped various recent Treasury actions, such as the decision to provide unlimited dollar funding to key central banks overseas and a flurry of moves yesterday by the Federal Deposit Insurance Corp., including those involving interbank lending, protection of non-interest-bearing accounts and a 30-day waiver of fees for these new programs. Another of Bernanke’s themes was that the government is doing its best to minimize the risk to taxpayers in its bailout plans. He noted the announcement that warrants will be used ensure that taxpayers will be able to participate in the upside of the federal government’s interventions and also pointed out the limitations on executive compensation. Bernanke also emphasized that the benefit for taxpayers should be seen not just in the potential returns on the government’s unprecedented equity investments in private companies, but in the bailout’s effects on the overall economy. The U.S. economy, he predicted, will emerge from this crisis “with renewed vigor.” One of the themes emerging from the punditocracy is that realigning misplaced human capital will be a big factor in setting the economy straight. On CNBC this morning, it was noted that 25 percent of the new jobs created over the past 10 years were in financial services or housing. And in his cover essay in the current issue of Newsweek, “There is a Silver Lining,” Fareed Zakaria quoted Boykin Curry, managing director of Eagle Capital Management of New York: “30 percent of S&P 500 profits last year were earned by financial firms, and U.S. consumers were spending $800 billion more than they earned every year. As a result, most of our top math Ph.D.’s were being pulled into nonproductive financial engineering instead of biotech research and fuel technology. Capital expenditure went into retail construction instead of critical infrastructure.” Zakaria added, “If some of the smart people on Wall Street end up building better models of energy usage and efficiency, that would be a net gain for the economy.” It will be interesting to see how, and how explicitly, the next presidential administration addresses this. Finally, as of presstime, the Federal Reserve Board was about to release its latest Beige Book. a summary of and commentary on current economic conditions.