Bernanke Warns Of 'Grave Threat' To U.S. Economy
Fed Chairman Pushes Bailout, Citing Worsening Credit Market
Thursday, September 25, 2008
Key supports that have bolstered the U.S. economy through the housing collapse and financial crisis appear to be weakening, making it all the more urgent that Congress quickly approve a Bush administration proposal intended to keep the crisis from spreading, Federal Reserve Chairman Ben S. Bernanke told lawmakers yesterday.
Testifying before the Joint Economic Committee, Bernanke warned lawmakers of the "grave threat" posed by deteriorating lending conditions, which could severely hamstring the economy in the near future. Just yesterday, the interest rates banks charge each other for short-term loans skyrocketed, showing a deepening of the credit crisis.
Solid consumer spending, business investment and exports have propped up the U.S. economy for the past year, but there are signs that all three could be weakening.
Bernanke called the proposal for massive government purchases of shaky mortgage assets essential to preventing the financial crisis from clogging the flow of credit and further slowing the economy. His comments came as some lawmakers expressed deep skepticism over the plan, which they said would help big banks at the expense of ordinary Americans.
Peter R. Orszag, the director of the Congressional Budget Office, testified yesterday that the proposed bailout could actually worsen the crisis by revealing more troubled assets on companies' books.
But Bernanke warned, "The intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth," he said.
He pointed to other ominous economic signs, including slowdowns in household spending and the sharp drop-off in motor vehicle sales.
Bernanke noted that despite some signs of stabilization in home sales, fewer new homes are being started, which could further slow construction-related businesses. Although business investment held up through the first part of the year, he said "a range of factors, including weakening fundamentals and constraints on credit, are likely to result in a considerable slowdown in the construction of commercial and office buildings" in the coming months. He noted that spending on business equipment and software also appeared poised to fall.
International trade has been a big driver of economic growth through the first part of the year, he said, but that appears set to dissipate amid a slowing global economy and deterioration in world financial markets.
Bernanke's pessimism was shared by other economists who worry that the economy, which has limped along for the past year despite upheavals in the housing and financial markets, could be on the verge of a pronounced slowdown, particularly if credit tightens further.
"We're worried, very worried," said David John, a senior fellow at the Heritage Foundation. "There is a significant amount of corporate debt that is going to come due on Sept. 30, [the end of the quarter]. The signs in the market -- interbank lending rates, high Treasury bill spreads -- indicate that it is going to be very difficult to roll over that debt much less get any new operating debt."
In a letter sent to members of Congress yesterday, Thomas R. Kuhn, president of the Edison Electric Institute, a lobbying group for public utilities, warned that short-term borrowing costs to utilities had already increased substantially. "If the current financial crisis is not resolved quickly, financial pressures on utilities will intensify sharply, resulting in higher costs to our customers" and possibly compromising service, he said.