Wednesday, February 25, 2009

Bernanke Cautiously Optimistic About the End of the Crisis

Sources: Washington Post, “Bernanke Hopes 2010 ‘Year of Recovery’ for U.S.”; Financial Times, “Bernanke Calms Nationalisation Fears

Chairman of the Federal Reserve Ben Bernanke told Congress that 2010 could be a “year of recovery” if the government’s efforts to prop up the financial industry succeed. If the government can’t stabilize the banking system and financial markets, then the recession could continue into 2010.

The Fed began stress tests on the nation’s major banks this week. Stress tests are intended to measure how much additional capital a bank would need to continue lending through a deeper-than-expected recession. If a particular bank is on the “brink of failure,” then the government will provide capital in the form of securities that convert to shares to shore up common equity as needed—and eventually, if the bank’s situation is dire enough, it would be seized by government regulators and effectively nationalized.

Bernanke also said that offering a more in-depth view of the Fed’s long-term inflation forecasts would help to calm fears and perceptions of long-term inflation expectations and thus keep actual inflation stable.

Bernanke asked Congress to make “fixing” the banking and financial systems its top priority. Congressmen disagreed over whether to give the Fed more regulatory responsibility over the financial system as a whole—or whether giving the Fed “a larger plate” makes it less likely to succeed at what it’s already charged with doing.

Questions for Discussion:

Do you think the economic stimulus, coupled with the Fed’s efforts to adequately explain their own predictions about the future of the economy, will end the recession in 2009? Is it too early to tell?

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