Financial Update (Fourth Quarter 2008)

Bernanke Remarks Set Stage to Address Challenges

photo of Fed Chairman Ben Bernanke Federal Reserve Chairman Ben Bernanke recently called actions by Congress, the U.S. Treasury, the Federal Reserve, and other agencies "momentous steps ... to address a problem of historic dimensions."

In remarks on Oct. 14 at the President's Working Group Market Stability Initiative announcement, Bernanke said the strategy to address the large and complex challenges in financial markets will continue to evolve.

Sounding a note of positive resolve, Bernanke said, "We will not stand down until we have achieved our goals of repairing and reforming our financial system and thereby restoring prosperity to our economy." He noted that policymakers in the United States and around the globe have taken a series of extraordinary steps to restore confidence by investors and the public in key financial institutions and markets.

Bernanke on current economic and financial situationsoff-site image
Bernanke speech on intention to stabilize marketsoff-site image

Speaking on Oct. 7 to the National Association for Business Economics annual meeting, Bernanke said that "financial systems in the United States and in much of the rest of the world are under extraordinary stress, particularly the credit and money markets." He described how even secured funding has become expensive and difficult to obtain because of lender worries about selling collateral in illiquid markets in the event of default.

A comprehensive approach
Bernanke described a series of recent actions to address liquidity issues. One of the most significant efforts was the Emergency Economic Stabilization Act 2008, which became law on Oct. 3.

Treasury Takes New Steps in Stabilization Efforts
Press releaseoff-site image

On Oct. 14, the U.S. Treasury announced three measures it is taking to restore stability to the financial marketplace. These steps involve

  • a capital purchase program. The voluntary program permits a broad array of financial institutions to sell preferred shares of its stock to the U.S. government;

  • a temporary guarantee of the senior debt of all financial institutions insured by the Federal Deposit Insurance Corp. as well as deposits in non–interest bearing deposit transaction accounts; and

  • the announcement of further details concerning the Commercial Paper Funding Facility (CPFF), the Federal Reserve's program that provides liquidity to the commercial paper market.

In its statement, the Treasury said these three steps would "significantly strengthen" the capital position and funding ability of U.S. financial institutions, enabling them to perform their role in the economy.

Bernanke pointed out three important legs to the new law. First, the act establishes a new Troubled Asset Relief Program. Under this program, the Treasury is authorized to purchase troubled mortgages, mortgage-related securities, and other financial instruments up to as much as a total of $700 billion. These instruments must be purchased from financial firms regulated under U.S. law, and those firms must have significant U.S. operations.

Second, the act raises the limit on deposit insurance at banks and credit unions—a step, according to Bernanke, that should reinforce depositors' confidence in the security of their funds. Third, the Federal Reserve has been granted the ability to pay interest on bank reserves. Bernanke notes that this last point will allow the Fed to expand lending as needed to support the system while better managing the federal funds rate.

Heading off risks to growth
"Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased," Bernanke noted. "At the same time, the outlook for inflation has improved somewhat, though it remains uncertain."

He concluded by saying he believes the recent bold actions to stabilize the economy "together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery."


October 17, 2008