Federal Reserve Chairman Comments on Economy

[Mar 20, 2008.]

The chairman of the Federal Reserve Board is sharing his thoughts on the state of the U.S. economy.

At a hearing before the House Financial Services Committee, Federal Reserve Chair Ben Bernanke stated that the economic situation has declined since July.

"Strains in financial markets, which first became evident late last summer, have persisted; and pressures on bank capital and the continued poor functioning of markets for securitized credit have led to tighter credit conditions for many households and businesses," Bernanke told committee members.

Bernanke added, "Heightened investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates, triggered the financial turmoil. However, other factors, including a broader retrenchment in the willingness of investors to bear risk, difficulties in valuing complex or illiquid financial products, uncertainties about the exposures of major financial institutions to credit losses, and concerns about the weaker outlook for economic growth, have also roiled the financial markets in recent months."

Could regulation assist in turning the economy around? Here's what Bernanke has to say about that:

"I think regulation can often be helpful in situations where there's an asymmetry of information or knowledge; where one side of the transaction is far more informed than the other side of the transaction…I think there can be circumstances when the products are very complicated, that it's important to help make sure that there are disclosures and practices so that the consumer can understand properly, you know, what it is that they're buying."

Meanwhile, Rep. Barney Frank, a Democrat from Massachusetts, stated, "What's interesting is the extent to which this is a very different kind of downturn…We are in a downturn, maybe a recession, maybe about to get one, in which the single biggest cause was excessive deregulation: the failure to understand that a vibrant, free enterprise system needs as a partner a public sector that understands how the market works, supports it, helps create the conditions in which the free market can then flourish, but also provide a set of rules that diminish abuses."

Julie Ann Amos
March 20th 2008

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