Source: Bloomberg
Aug. 21 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said the global economy is “beginning to emerge” from a recession after “aggressive” action by central banks and governments.
“After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,” Bernanke said today in a speech at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming.
Economists forecast the U.S. will emerge from the worst recession since the 1930s, with the economy in the third quarter expanding at a 2.2 percent annual rate, according to the median estimate in an August survey by Bloomberg News. The International Monetary Fund last month predicted the world economy will expand 2.5 percent in 2010 after contracting 1.4 percent this year.
Signs are emerging that growth is resuming in other countries, with Japan, Germany and France all expanding in the second quarter. The Paris-based Organization for Economic Cooperation and Development said Aug. 19 that the economy of its 30 members was flat in the second quarter after contracting 2.1 percent in the previous three months.
Feldstein Sees Danger
The U.S. economy “is still weak and it’s not at all clear that the upturn that we’ve seen recently is the beginning of a sustainable rise,” Harvard University economist Martin Feldstein said in a Bloomberg Television interview in Jackson Hole. “There’s a serious danger that come the end of this year and the beginning of next year we will see it slipping back down again.”
Bernanke said the world economy still confronts “critical” challenges.
“Strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit,” Bernanke said. Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”
U.S. stocks gained for a fourth day, and Treasury securities fell in reaction to Bernanke’s speech and a rise in existing home sales. The Standard and Poor’s 500 Index was up 1.5 percent at 10:51 a.m. in New York. Benchmark 10-year notes yielded 3.54 percent, up 11 basis points from yesterday.
Home Sales Climb
Sales of existing U.S. homes climbed 7.2 percent to a 5.24 million annual rate, the most since August 2007, the National Association of Realtors said.
European Central Bank President Jean-Claude Trichet and Bank of Japan Governor Masaaki Shirakawa are scheduled tomorrow to address the conference. Brian Madigan, Bernanke’s top official for monetary policy, is scheduled to speak today as part of a panel discussion. The topic of the central bank’s mountainside conference this year is financial stability and macroeconomic policy.
The IMF may raise its forecast for the global economic rebound, John Lipsky, the fund’s first deputy managing director, said in an interview yesterday in Jackson Hole.
A “strong and unprecedented international policy response” averted “the imminent collapse of the global financial system,” Bernanke said. The Fed has “consistently maintained” that the failure of a large, interconnected financial institution would have dire consequences for markets and the economy.
‘Spared No Effort’
“We have therefore spared no effort, within our legal authorities and in appropriate cooperation with other agencies, to avert such a failure,” he said. “The case of the investment bank Lehman Brothers proved exceptionally difficult, however.”
The Fed chairman reiterated that Lehman had inadequate collateral to merit a Fed loan “of sufficient size to meet its funding needs.” The government also lacked the authority to inject capital and sustain the firm, he said. Lehman Brothers Holdings Inc. filed for bankruptcy in September.
“Although concerted policy actions avoided much worse outcomes, the financial shocks of September and October nevertheless severely damaged the global economy — starkly illustrating the potential effects of financial stress on real economic activity,” Bernanke said.
Last week, Fed policy makers extended by a month, through October, a $300 billion program to buy long-term U.S. Treasuries, aiming to ensure a “smooth transition in markets.” They also affirmed a pledge to keep interest rates near a record low for an “extended period” even as they determined the economy is “leveling out.”
Fed’s Debt Purchases
Since the collapse of Lehman, the Fed has bought as much as $350 billion of short-term debt issued by companies including General Electric Co. and expanded currency swaps with other central banks to aid financial firms outside the U.S.
Bernanke has also led policy makers in a reduction of the benchmark interest rate almost to zero and in the purchase of as much as $1.75 trillion of Treasuries and housing debt.
“As severe as the economic impact has been, however, the outcome could have been decidedly worse,” Bernanke said. “Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal and financial policies around the world have been aggressive and complementary.”
Policy makers must now rewrite regulations to reflect lessons from the crisis, and that will prevent “a recurrence of the events of the past two years,” he said.
Term Expiring
President Barack Obama has yet to indicate whether he will nominate Bernanke for a second term as Fed chief after his current term ends Jan. 31.
Feldstein endorsed Bernanke for a second term. “He certainly deserves it. He has done a remarkably creative job of dealing with these problems,” Feldstein said.
Investors and traders see reappointment as increasingly likely. Yesterday, futures contracts on the Web site Intrade showed a 79 percent chance Bernanke will be tapped for a second term.
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net.
