Bernanke Warns U.S. Budget Deficits Threaten Financial Stability

… and so does creating money out of thin air Mr. Bernanke.

Ben Bernanke: “The Federal Reserve will not monetize the debt”, BUT ‘the Fed announced plans in March to buy $300 billion of long-term government bonds’.

The U.S. is totally broke and the dollar will soon be bad toilet paper, thanks to the government and the Federal Reserve.

The Federal Reserve Will Not Monetize The Debt: Bernanke

Ben S. Bernanke, chairman of the U.S. Federal Reserve, testifies at a House Budget Committee hearing in Washington on June 3, 2009. Photographer: Joshua Roberts/Bloomberg News

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.”

Related article: Treasuries Rise as Bernanke Warns on Deficits, Fed Buys Debt (Bloomberg)

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 in his remarks to the House Budget Committee that deficit concerns are already influencing the prices of long-term Treasuries.

Yields on 10-year notes have climbed about 1 percentage point since the Fed announced plans in March to buy $300 billion of long-term government bonds. The notes yielded 3.57 percent at 11:37 a.m. in New York, down from 3.61 percent late yesterday.

Rise in Yields

“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.”

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.

“Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”

Bernanke also addressed banks’ efforts to bolster common equity in the aftermath of regulators’ stress tests on the 19 largest U.S. lenders. He said the 10 firms that were found to have a total capital shortfall of $75 billion have now sold or announced plans to boost common equity by $48 billion.

“We expect further announcements shortly” as the banks submit plans due by June 8, Bernanke said.

This year’s projected budget deficit, four times the size of last year’s shortfall, has been driven up mostly by costs associated with the financial crisis.

‘Financing Problems’

“Bernanke knows that fiscal financing problems are already complicating monetary policy and are in danger of undermining Fed credibility,” said Alan Ruskin, chief international strategist at RBS Securities Inc. in Stamford, Connecticut. “He knows that there is only so much quantitative-easing financing that can be done.”

A fiscal stimulus of almost $800 billion, the government’s financial rescue effort, takeovers of Fannie Mae and Freddie Mac and increased costs of running safety-net programs such as unemployment insurance have added billions to spending.

President Barack Obama has pledged to halve the deficit by the end of his term. Even if successful, his administration anticipates the government will still run what would be, by historical standards, large deficits for the foreseeable future. Bernanke said the debt-to-gross domestic product ratio is set to reach the highest since the 1950s.

Administration’s Goal

Treasury Secretary Timothy Geithner, in an interview with Bloomberg Television May 21, said the administration’s goal is to cut the budget shortfall to 3 percent of GDP or smaller.

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.

Wisconsin Representative Paul Ryan, the ranking Republican on the committee, said in opening remarks that the Treasury’s debt issuance and the Fed’s monetary stimulus, including purchases of government bonds, “can be a dangerous policy mix” and risks “runaway inflation” in the longer term.

Ryan said he’s concerned about “substantial” political pressure on the Fed to delay plans to tighten credit should unemployment remain high.

“The Fed’s political independence is critical and essential for safeguarding its commitment to price stability,” Ryan said. “We policy makers should realize that our most challenging policy period is going to be ahead of us.”

‘Great Skepticism’

In Europe, German Chancellor Angela Merkel said yesterday she views “with great skepticism what authority the Fed has and the leeway the Bank of England has created for itself,” to purchase a range of assets in their efforts to end the crisis. She urged central banks to return to a “policy of reason.”

Asked by a lawmaker about Merkel’s comments, Bernanke said, “I respectfully disagree with her views.”

“I am comfortable with the policy actions that the Federal Reserve has taken,” he said. “We are comfortable that we can exit from those policies at the appropriate time without inflationary consequences.”

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.

Lower Borrowing Costs

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.

Bernanke reiterated the Fed will “soon” begin disclosing more information on its lending as part of efforts to “enhance” the central bank’s transparency. The Fed will issue monthly reports with “considerable new information concerning the number of borrowers at our various facilities, the concentration of borrowing, and the collateral pledged,” the chairman said.

That would fall short of demands by some lawmakers, including Vermont Senator Bernie Sanders, the independent who in April won Senate approval of a nonbinding resolution asking the Fed to identify borrowers.

To contact the reporter on this story: Craig Torres in Washington at; Brian Faler in Washington at

Last Updated: June 3, 2009 11:48 EDT
By Craig Torres and Brian Faler

Source: Bloomberg

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