Tax Quote of the Week
"Virtually all persons or objects in this country... may have tax problems. Every day the economy generates thousands of sales, loans, gifts, purchases, leases, wills and the like, which suggests the possibility of tax problems for somebody. Our economy is tax relevant in almost every detail."
-- Potter Stewart
Chairman Bernanke Open to Stimulus II
In a hearing this week before the House Budget Committee, Chairman of the Federal Reserve Ben Bernanke discussed the efforts of the federal government to resolve the current credit crisis. At the end of his testimony, he also spoke favorably for the first time about a potential second stimulus bill.
Chairman Bernanke noted that "The turmoil is the aftermath of a credit boom characterized by underpricing of risk, excessive leverage, and an increasing reliance on complex and opaque financial instruments that have proved to be fragile under stress." He continued to describe the current situation and noted, "As confidence in the financial markets has declined and concerns about the U.S. and global economies have increased, equity prices have been volatile, falling sharply on net."
To resolve the credit crisis, the Federal Reserve has taken several specific actions. These include the following:
- Increased Federal Deposit Insurance Corporation (FDIC) insurance coverage from $100,000 to $250,000 per account.
- A temporary provision for unlimited insurance coverage of funds held in payroll and other bank accounts.
- FDIC guarantees for senior unsecured debt of banks.
- An appeal to the global banking community to take similar steps.
Chairman Bernanke highlighted the importance of "international consultation and corporation" on these steps in order to resolve the credit crisis. He indicated that "These initiatives, together with other actions by the Treasury, the Federal Reserve, and other regulators, will help restore trust in our financial system."
At the close of his testimony, Chairman Bernanke also discussed the "desirability of a second fiscal package." Given the current market fluctuation and economic uncertainty, he indicated that "consideration of a fiscal package by the Congress at this juncture seems appropriate."
Chairman Bernanke urged Congress to be very careful in the design of the second stimulus package. The provisions should be timely, targeted and need to limit the long term effect on the "structural budget deficit."
Editor's Note: With the probable 2009 Federal Deficit well over $500 billion, Chairman Bernanke and members of Congress are mindful of two concerns. First, the credit crisis still requires further government action to assist the economy. But second, the budget deficit could be $700 to $900 billion with the second stimulus package. Even a superpower like the United States could face inflation and higher interest rates with budget deficits of that magnitude.
Chairman Bernanke Highlights the Path to Recovery
As part of his testimony on October 20, 2008 before the House Budget Committee, Chairman Bernanke also highlighted both the economic challenges and the signs to watch for that will indicate recovery.
There are five specific economic challenges.
- Unemployment increased from 4.8% in January to 6.1% in September.
- There has been a sharp decline in auto sales due to reduced availability of credit.
- Consumer sentiment is understandably "quite low."
- There have been declines in business investment that are likely to continue.
- The housing market "remains depressed." New construction and sales of existing homes have fallen to very low levels and it will probably be another year before housing recovers.
The silver lining is that exports and international trade have been quite strong. In addition, the decline in commodity prices, especially gasoline and petroleum products, will help consumers.
Signs of recovery in the economy will be the stabilization of the housing markets, an improvement in the willingness of banks to lend funds and a rebound in employment.
