NEW YORK (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday the global economy is being hit hard by a financial crisis and how governments respond will determine the timing and strength of recovery.
KEY POINTS: * “For almost a year and a half the global financial system has been under extraordinary stress — stress that has now decisively spilled over to the global economy more broadly,” he said in remarks prepared for delivery at the London School of Economics. * “The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial,” he said. * In his first policy speech since early December, Bernanke said the Fed still has “powerful tools” that could be expanded to spur a rebound even though it has dropped benchmark interest rates to near zero.
“We are very much interested in quantitative easing, in terms of what additional steps can policy makers take now that the fed funds rate is zeroed out. The economy is still losing momentum here, and we want to know what policy makers can do to address that. The additional thing was they could set up so called bad banks and capitalize them to try and get these toxic assets off the books of financial institutions.”
“He’s noting that problems with bank assets remain and this is driving illiquidity in the system in spite of the extensive measures undertaken by the government and the Fed including the Fed’s issuing more dollars, expanding their balance sheet. So he’s basically suggesting that taking care of bank equity and liability is not enough to restore normal market activity. The Fed must expand its focus to insure asset quality by creating a liquidity facility. This is a very key turning point in the Fed’s sentiment toward this crisis because it resurrects the spirit behind (the original TARP.)”
ROBERT MACINTOSH, CHIEF ECONOMIST, EATON VANCE MANAGEMENT CORP,
“I don’t think there’s anything here that is surprise, he’s saying there’s a need for monetary and fiscal policy actions and they are already doing that... Maybe one piece of news is the setting up one of these bad bank programs which is what ultimately solved the S&L crisis a while back... but he doesn’t really spell out how likely that is to happen. I haven’t heard anybody talk about that for a while. I think all these different programs are starting to have to some traction, we are starting to see some improvement. But here’s another thing that they could do. I think it should be (effective), somehow you need to find way to value these assets. It could help get the lending machine running more efficiently.”
STEVE GOLDMAN, MARKET STRATEGIST, WEEDEN & CO, IN GREENWICH,
“Unless there’s any policy change that’s quantitative, I’m not sure we’re going to see much movement in the S&P. It looks like some of it is just bullet points. It’s more of a big overview of what has happened and what could happen. It’s not a big policy change, just an elaboration of the current policy, what has happened and what will happen. I wasn’t expecting a big change, though.”
MICHAEL WOOLFOLK, SENIOR CURRENCY STRATEGIST, THE BANK OF NEW
YORK-MELLON, NEW YORK:
“It appears Bernanke’s comments indicate the Fed will continue with its programs aimed at stimulating the economy via the buyback of government securities, but with the caveat that at some point the Fed must unwind various lending programs. The criticism that has been leveled at the Fed is having its desired effect which is that the Fed must be cautious about over stimulating the economy and be prepared to take back the monetary stimulus once the economy begins to recover. The trend for the dollar this morning is higher, this has only fed into the dollar rally. The dollar is trading just above key technical levels and likely we will wait for the U.S. trade data.”
MARKET REACTION: STOCKS: U.S. equity index futures hold losses. BONDS: U.S. Treasury prices edge lower. DOLLAR: U.S. dollar holds gains versus euro.