WASHINGTON, Nov 16 Below is the complete text of Federal Reserve Chairman Ben
Bernanke's speech on Monday on the outlook for the economy and Fed policy to the Economic Club of
When I last spoke at the Economic Club of New York a little more than a year
ago, the financial crisis had just taken a much more virulent turn. In my remarks at that
time, I described the extraordinary actions that policymakers around the globe were
taking to address the crisis, and I expressed optimism that we had the tools necessary to
stabilize the system.
Today, financial conditions are considerably better than they were then, but
significant economic challenges remain. The flow of credit remains constrained,
economic activity weak, and unemployment much too high. Future setbacks are possible.
Nevertheless, I think it is fair to say that policymakers' forceful actions last fall, and
others that followed, were instrumental in bringing our financial system and our economy
back from the brink. The stabilization of financial markets and the gradual restoration of
confidence are in turn helping to provide a necessary foundation for economic recovery.
We are seeing early evidence of that recovery: Real gross domestic product (GDP) in the
United States rose an estimated 3-1/2 percent at an annual rate in the third quarter,
following four consecutive quarters of decline. Most forecasters anticipate another
moderate gain in the fourth quarter.
How the economy will evolve in 2010 and beyond is less certain. On the one
hand, those who see further weakness or even a relapse into recession next year point out
that some of the sources of the recent pickup--including a reduced pace of inventory
liquidation and limited-time policies such as the "cash for clunkers" program--are likely
to provide only temporary support to the economy. On the other hand, those who are
more optimistic point to indications of more fundamental improvements, including strengthening
consumer spending outside of autos, a nascent recovery in home construction, continued
stabilization in financial conditions, and stronger growth abroad.
My own view is that the recent pickup reflects more than purely temporary factors
and that continued growth next year is likely. However, some important headwinds--in
particular, constrained bank lending and a weak job market--likely will prevent the
expansion from being as robust as we would hope. I'll discuss each of these problem
areas in a bit more detail and then end with some further comments on the outlook for the
economy and for policy.
Bank Lending and Credit Availability
I began today by alluding to the unprecedented financial panic that last fall
brought a number of major financial institutions around the world to failure or the brink
of failure. Policymakers in the United States and abroad deployed a number of tools to
stem the panic. The Federal Reserve sharply increased its provision of short-term
liquidity to financial institutions, the U.S. Treasury injected capital into banks, and the
Federal Deposit Insurance Corporation (FDIC) guaranteed bank liabilities. The Federal
Reserve and the Treasury each took measures to stop a run on money market mutual
funds that began when a leading fund was unable to pay off its investors at par value.
Throughout the fall and early this year, a range of additional initiatives were required to
stabilize major financial firms and markets, both here and abroad. (1)
The ultimate purpose of financial stabilization, of course, was to restore the
normal flow of credit, which had been severely disrupted. The Federal Reserve did its
part by creating new lending programs to support the functioning of some key credit
markets, such as the market for commercial paper--which is used to finance businesses'
day-to-day operations--and the market for asset-backed securities--which helps sustain
the flow of funding for auto loans, small-business loans, student loans, and many other
forms of credit; and we continued to ensure that financial institutions had adequate access
to liquidity. Additionally, we supported private credit markets and helped lower rates on
mortgages and other loans through large-scale asset purchases, including purchases of
debt and mortgage-backed securities issued or backed by government-sponsored
Partly as the result of these and other policy actions, many parts of the financial
system have improved substantially. Interbank and other short-term funding markets are
functioning more normally; interest rate spreads on mortgages, corporate bonds, and
other credit products have narrowed significantly; stock prices have rebounded; and some
securitization markets have resumed operation. In particular, borrowers with access to
public equity and bond markets, including most large firms, now generally are able to
obtain credit without great difficulty. Other borrowers, such as state and local
governments, have experienced improvement in their credit access as well.
However, access to credit remains strained for borrowers who are particularly
dependent on banks, such as households and small businesses. Bank lending has
contracted sharply this year, and the Federal Reserve's Senior Loan Officers Opinion
Survey shows that banks continue to tighten the terms on which they extend credit for
most kinds of loans--although recently the pace of tightening has slowed somewhat.
Partly as a result of these pressures, household debt has declined in recent quarters for the
first time since 1951. For their part, many small businesses have seen their bank credit
lines reduced or eliminated, or they have been able to obtain credit only on significantly
more restrictive terms. (2) The fraction of small businesses reporting difficulty in obtaining
credit is near a record high, and many of these businesses expect credit conditions to
To be sure, not all of the sharp reductions in bank lending this year reflect
cutbacks in the availability of bank credit. The demand for credit also has fallen
significantly: For example, households are spending less than they did last year on bigticket
durable goods typically purchased with credit, and businesses are reducing
investment outlays and thus have less need to borrow. Because of weakened balance
sheets, fewer potential borrowers are creditworthy, even if they are willing to take on
more debt. Also, write-downs of bad debt show up on bank balance sheets as reductions
in credit outstanding. Nevertheless, it appears that, since the outbreak of the financial
crisis, banks have tightened lending standards by more than would have been predicted
by the decline in economic activity alone.
Several factors help explain the reluctance of banks to lend, despite general
improvement in financial conditions and increases in bank stock prices and earnings.
First, bank funding markets were badly impaired for a time, and some banks have
accordingly decided (or have been urged by regulators) to hold larger buffers of liquid
assets than before. Second, with loan losses still high and difficult to predict in the
current environment, and with further uncertainty attending how regulatory capital
standards may change, banks are being especially conservative in taking on more risk.
Third, many securitization markets remain impaired, reducing an important source of
funding for bank loans. In addition, changes to accounting rules at the beginning of next
year will require banks to move a large volume of securitized assets back onto their
balance sheets. Unfortunately, reduced bank lending may well slow the recovery by
damping consumer spending, especially on durable goods, and by restricting the ability of
some firms to finance their operations.