We're Laying the Groundwork for Recovery, by Ben Bernanke, Commentary, WSJ: ...Over the past year, the Federal Reserve has actively used all its powers and authority to try to help our economy through this difficult time. Central banks around the world have also consulted closely and cooperated in unprecedented ways... We will continue to do so. However, clearly the time had come for a more comprehensive and broad-based solution.
History teaches us that government engagement in times of severe financial crisis often arrives very late, usually at a point at which most financial institutions are insolvent or nearly so. In these conditions, the consequences and costs of inertia and inaction can be staggering. Fortunately, that is not the situation we face today.
The Congress and the administration acted at a time when the great majority of financial institutions, though stressed by highly volatile and difficult market conditions, remain capable of fulfilling their critical function of providing new credit for our economy. Their prompt passage of the financial rescue legislation made possible the critical measures that will be announced this morning. These steps will allow us to restore more normal market functioning, and encourage private capital to further support the reinvigoration of financial markets.
I also find it heartening that we are seeing not just a national response but a global response to the crisis, commensurate with its global nature. Indeed, this weekend, the finance ministers and central bankers of the G-7 industrialized countries announced a comprehensive plan to unfreeze credit and money markets, increase capital in banks and other financial intermediaries, and protect deposits. Each of these governments is now moving quickly to put their own specific measures in place. The announcements we are making today are consistent with the G-7's statement of principles.
As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets. This has had cascading and unwelcome effects on credit availability for households and businesses, and on the value of savings. Under these circumstances, steps to restore confidence in our institutions and markets will go far toward resolving the current market stress. Our economy will not be able to function at its best unless and until financial market stability returns. ...
The most immediate responsibility of policy makers and elected officials is to restore confidence in our credit markets. Even as we do this, we must begin to consider long-term reforms that will mitigate similar crises in the future. A comprehensive review of our regulatory structures is an essential task in the coming year. The events of the past year or two have highlighted regulatory gaps and deficiencies that we must address... As we recover from the current crisis, it will be important to address these issues as soon as possible...
Policy makers here and around the globe have taken a series of extraordinary steps. Americans can be confident that every resource is being brought to bear: historical understanding, technical expertise, economic analysis and political leadership.
I am not suggesting the way forward will be easy. But the tools are in place to respond effectively and with force. These tools will bolster the capital of our financial institutions, restore confidence in their debt, and offer increased access to funding for businesses. Their application, together with the underlying power and resilience of the American economy, will help to restore confidence to our financial system and place our economy back on a path to vigorous growth.
This isn't the most important thing to worry about right now, but I'm wondering why Bernanke didn't post his remarks on the Fed's website instead of on the WSJ editorial page. If it was on the Fed's site, the WSJ would run it in its entirely, as would many other papers. So why limit the audience?
As to whether the plan works or not, we don't yet know, but our best chance involves a sustained, flexible effort on the financial side, and I'm confident the Fed will stay with this, and just as importantly it requires that we implement programs to limit foreclosures and provide a sustained fiscal stimulus. There is a lag between the time shocks hit an economy and when they are felt, and the problems we are seeing in the real economy presently are the result of shocks that happened months ago, not what just occurred in credit markets. The recent shocks to the financial sector won't be felt until months, or in some cases years, from now.
Typically, recovering from a credit crisis, particularly one involving housing markets which are notoriously slow to adjust, is a long, drawn out process. What is uncertain is the depth of the plunge in output and employment, and that's where the bailout and the follow-up (assuming there is one) can help.
There have been huge losses, and they must be absorbed within the system - we won't suddenly rebound to where we were. At best, with an effective bailout program and follow-up that provides fiscal stimulus and limits foreclosures, we will have a period of recovery characterized by slow growth rather than a period of stagnation or contraction.
But while we can't do anything about the losses that have already occurred, and the effects those losses have had on output and employment, we can do something about the potential for losses in the future and I hope that worries about the deficit do not prevent us from taking the steps we need to take to limit the potential for large reductions in output and employment.