January 17, 2008
Dow Plummets; Bernanke Calls For Stimulus ASAP
UPDATED.
Blue chips sank more than 300 points today, the biggest single-day drop of the year so far. The slide suggests that a federal economic stimulus fix currently in the works may be arriving too late for investors' tastes.
Federal Reserve Chairman Ben Bernanke told lawmakers this morning that if they were serious about putting the brakes on the U.S. economic slowdown, any congressional stimulus package would have to be implemented sooner rather than later.
"To be useful, a fiscal stimulus package should be implemented quickly and structured so its effects on aggregate spending will be felt in the next months or so," Bernanke said in his opening remarks before the House Budget Committee. "There could be destabilization if the package comes at a time growth is improving. Measures that rely on long lead times will not provide stimulus when it is most needed."
President Bush had been expected to announce his own stimulus package ahead of his State of the Union address on Jan. 28, but the White House said today that he would be discussing the proposals on deck in a speech tomorrow. Investors are clearly impatient for some sort of cash injection into the economy, and a round of negative economic reports today only underscored the urgency with which Wall Street wants help halting the nation's growth slowdown.
Notably, Bush appears to be heeding the advice dispensed by Bernanke, and moving more quickly on a stimulus package than originally planned. At the noon press briefing, while Bernanke was still testifying, spokesman Tony Fratto said there was no time frame for when the president planned to address the economy and indicated the White House was still hanging on to hope it would be able to use the package to make tax cuts permanent.
Bush met with congressional leaders from both parties following Bernanke's testimony, and press secretary Dana Perino announced that the president's main concerns now were that the package be temporary, effective and pass as quickly as possible. According to House Minority Leader John Boehner, the package could top out at $150 billion.
Bernanke's assurances did nothing to calm nervous investors, who sent the Dow into a 307-point freefall to close at 12,159.2 -- a 10-month low. Bad news from several sectors spurred the sell-off.
A report from the Philadelphia Federal Reserve this morning found that manufacturing activity had dropped to levels not seen since October 2001. The Commerce Department announced that construction activity fell 4 percent to its lowest rate since July 1992. And as anticipated, Merrill Lynch reported a record Q4 loss.
In his testimony, Bernanke described any legislated stimulus as supplementary to the work the Fed was already doing to right the wobbly economy. The Fed chipped away at rates in 2007, but is under pressure to deliver a more dramatic response. A quarter-point cut in the benchmark federal funds rate in December disappointed investors, sending the Dow into a nosedive.
"In light of recent changes in the outlook for and risk to growth, additional policy easing may be necessary," Bernanke said, with expected caution. "We stand ready to take substantive additional action as needed to promote growth and as-needed insurance to prevent downside risk."
Bernanke stressed that the public had no reason whatsoever to panic about the U.S. economy, which remains "diversified" and "resilient." However, he added, it was crucial to keep consumer confidence at least level to lay the groundwork for a bounce in growth. Whether this was intended as a warning to lawmakers against making political mincemeat of the economy wasn't clear, since Bernanke seemed to be taking extra pains to avoid saying anything that might send Wall Street into a tizzy -- having learned, evidently, from his predecessor, Alan Greenspan.
Democratic lawmakers on the panel tried repeatedly to goad Bernanke into saying something declarative about Bush's bid to make his tax cuts permanent. In his new book, Greenspan expressed deep regret for having signed on to Bush's post-9/11 tax cuts. But Bernanke wouldn't take the bait.
"The primary reason for advocating [permanent tax cuts] would be for long-term growth purposes. Our discussion today is about short-term stimulus," Bernanke said. "The evidence suggests that measures that involve putting money in the hands of households and firms that will spend it in the near term would be more effective. I'm not taking a view one way or another on the desirability for those long-term tax cuts being made permanent," he added.
Republicans on the committee also tried to nudge Bernanke into saying something positive about Bush's post-9/11 stimulus, in an apparent effort to counter the charges in Greenspan's book. Again, Bernanke wouldn't bite. But he did lay out what he called "the law of arithmetic" for Congress to follow.
"What comes in has to equal what goes out at some point," Bernanke told lawmakers. "There are various alternatives that Congress has, but at some point I hope the law of arithmetic will play a part in your consideration."
In his opening statement, Bernanke urged lawmakers to take a measured approach to the stimulus package. Congress should take into account America's "aging population, rising health care costs and other factors," he advised. "A program that increases the deficit would only make meeting those challenges more difficult."
Lawmakers are sounding the mantra of "targeted, timely and temporary" as they huddle over the best approach to a stimulus package. The legislation will include some form of immediate tax rebate, plus an extension of unemployment benefits and expansion of food stamps eligibility. Though House Republicans initially smelled an opportunity to fold in a provision that would make Bush's tax cuts permanent, it now appears they will back off (subscription) to avoid holding up the package.
Bernanke, a former economics professor at Princeton University, took over for Greenspan in February 2006. Wall Street jokingly (and affectionately) referred to Greenspan as The Oracle, and Bernanke seems to have won similar respect, if not the near-cult-like status Greenspan enjoyed.
Though Bernanke steadfastly tried to avoid weighing in on the soundness of Bush's tax cuts, he indicated he felt strongly that low taxes should be met with lowered spending. Fiscal-conservative Republicans concede that spending has skyrocketed under their watch. A late 2006 report by the conservative Heritage Foundation found that spending jumped 45 percent since Bush took office, three times the rate of the Clinton administration.
"Tax cuts generally do not pay for themselves," Bernanke said, contradicting Bush administration gospel. "Again, you need to cut spending if you have lower taxes. Lower taxes are a good thing generally, but you need to make spending cuts concurrent with lower taxes."
An unpleasantly surprised Dan Lungren, R-Calif., told the Fed chairman, "I hope that's not what the American people just heard, that if we allow you to keep money we just cost you money."
As for the direction the overall economy was heading in, Bernanke said the nation was not yet in recession. He warned that "we are looking at a slowdown," but expressed confidence that strong productivity and a "flexible workforce" would eventually help speed things up again. "I'm not here at all to be saying negative things about the long-term potential of the U.S. economy. I think it's excellent. I do think we have important challenges" ahead, he added.
Asked what Congress could do to ensure the long-term health of the economy, Bernanke said that the government needed to focus on education and health care costs. Health care is a major focus of the presidential campaigns, and it appears certain new programs will be implemented regardless of who is elected in November. For lawmakers, education has been a more elusive problem. Bernanke appeared to be addressing the growing lag in math, science and reading skills among American students when he raised education's role in the economy.
Committee members were clearly looking for advice from Bernanke as they finalize their stimulus proposals. He managed to avoid the appearance of dictating policy, while drawing in broad strokes a basic outline for lawmakers.
"Whether you have well-designed taxes that promote efficiency, promote growth, promote savings, promote economic activity... the challenge is finding the right balance. How big a share of the nation's GDP do we want to [devote to federal spending], it's up to you as representatives of the people to make a judgment about how big a share of the economy should be devoted to government spending," Bernanke said. "A lot depends on how well the money is used and how well the taxes are collected. You're better off if you put money into things that promote growth."
Posted at 4:46 PM
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Ben Bernanke, Bush Administration, Congress, Economy, Federal Reserve, House, President Bush, Taxes
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