Bernanke harps on fiscal discipline

Narayan Lakshman

Washington DC: Striking a note of concern about the fiscal situation, Chairman of the Federal Reserve Ben Bernanke on Wednesday said: “To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programmes such as Social Security and Medicare, less spending on everything else from education to defence, or some combination of the above.”

In a speech to the Dallas Regional Chamber of Commerce, Mr. Bernanke said addressing the fiscal challenges posed by an aging population would require “a willingness to make difficult choices”.

He cautioned that the economy continued to operate “well below its potential”, implying that sharp near-term reductions in the fiscal deficit would probably be neither practical nor advisable.

Commitment

He said the U.S. ought to demonstrate a strong commitment to fiscal responsibility, for if it did not do so, in the longer run the country would have neither financial stability nor healthy economic growth.

While describing the short- and long-term economic challenges as “daunting”, he also touched a cautiously optimistic note when he said, “My best guess is that economic growth, supported by the Federal Reserve's stimulative monetary policy, will be sufficient to slowly reduce the unemployment rate over the coming year.”

He said though unemployment rate had “edged off its recent peak”, at 9.7 per cent, it was still close to its highest level since the early 1980s and hiring remained “very weak”.

Housing sector

On the housing sector, at the heart of the economic crisis since 2008, Mr. Bernanke voiced continuing concern, saying, “We have yet to see evidence of a sustained recovery in the housing market. Mortgage delinquencies for both subprime and prime loans continue to rise as do foreclosures.” He warned that the commercial real estate sector remained troubled, and that was a concern for communities and for banks holding commercial real estate loans. Mr. Bernanke expressed support for Congressional efforts – led by Senator Chris Dodd – to get financial regulation bills passed.

However he added, “But we are not waiting for new legislation to make improvements. We have been working hard to strengthen our own oversight of financial institutions and to broaden our field of vision to include potential risks to the financial system as a whole as well as risks to individual firms.”