NEW YORK, July 15, 2008
Fed Throws More Cold Water On Economy
Chairman Bernanke Admits "Numerous Difficulties" And "Significant Challenges" Face U.S.
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Play CBS Video Video Feds Soothe Economic Worries The top economic heavyweights of the Bush administration tried to ease fears over the nation's banking system, and made assurances for the recovery of the U.S. economy. Anthony Mason reports
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Righting wobbly financial markets is key to getting the economy back on track, Federal Reserve Chairman Ben Bernanke said. (AP Photo/Susan Walsh)
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Timeline Credit Crunch Feeling the squeeze? Here's a look at actions and statements from key players in Washington.
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Interactive Eye On The Economy In-depth features on U.S. markets, taxes, employment and the Federal Reserve.
At the same time, Bernanke, testifying before the Senate Banking Committee, sounded another warning that rising prices for energy and food are elevating inflation risks. This problem looms even as officials try to cope with persistent strains in financial markets, rising joblessness and housing problems.
The situation, he said, poses "significant challenges" for Fed policymakers as they try to chart the best course for keeping the economy growing, while making sure inflation doesn't dangerously flare up. All the economy's problems, including slumping home values, which threaten to make people feel less wealthy and less inclined to spend in the months ahead, represent "significant downside risks" to economic growth.
Over the rest of this year, the economy will grow "appreciably below its trend rate" mostly because of continued weakness in housing markets, high energy prices and tight credit conditions.
As Bernanke spoke, President George W. Bush addressed the economy at a press conference Tuesday.
The president urged lawmakers to move quickly in putting into force legislation designed to help prop up mortgage giants Fannie Mae and Freddie Mac while declaring the U.S. financial system to be "basically sound."
On Wall Street, stocks slumped. The Dow Jones industrials were down around 50 points, after suffering steeper losses earlier in the morning.
The day's other big financial news was General Motors Corp. announcing it will lay off salaried workers, cut truck production, suspend its dividend and borrow $2 billion to $3 billion to weather a severe downturn in the U.S. market.
GM said the moves will raise $15 billion to help cover losses and turn around its North American operations, including $10 billion from internal cost-cutting and $5 billion from selling some assets and borrowing against others.
"In short, our plan is not a plan to survive. It is a plan to win," GM Chairman and CEO Rick Wagoner said in a broadcast to employees.
Bernanke's testimony comes just two days after the Fed and the Treasury Department came to the rescue of mortgage giants Fannie Mae and Freddie Mac, offering to throw them a financial lifeline.
The Fed chief was later joined by Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Chris Cox, who were summoned to detail the rescue plan.
The two companies hold or guarantee more than $5 trillion in mortgages - almost half of the nation's total. The Bush administration is asking Congress to temporarily increase lines of credit to Fannie and Freddie and to let the government buy their stock. The Fed has offered to let the companies draw emergency loans.
The pledges of aid have raised concerns about the government's role in such financial problems and the risk to taxpayers.
Sen. Christopher J. Dodd, D-Conn., the Banking Committee chairman, called the plan "unprecedented."
Dodd said the rescue raises serious questions "about the nature of the economic crisis facing our nation, about the ability of these proposals to address this crisis effectively, and about the burden that the American taxpayer potentially is being asked to carry."
Paulson said that if the government extends any financial backing to the two institutions it will be done "under terms and conditions that protect the U.S. taxpayer." He didn't provide details.
Sen. Richard C. Shelby of Alabama, the panel's senior Republican, cautioned, "I fear that we're sitting on a financial powder keg."
On the economic front, inflation has remained high and "seems likely to move temporarily higher in the near term," Bernanke warned.
Indeed, before Bernanke delivered his twice-a-year comprehensive economic assessment to Congress, the Labor Department reported wholesale prices jumped 1.8 percent in June. That left inflation rising over the past year at the fastest pace in more than a quarter-century.
"Given the high degree of uncertainty" about the Fed's economic outlook, Fed policymakers will need to carefully assess incoming information about inflation and economic growth, he said.
The Fed in June signaled an end to its nearly year long rate-cutting campaign because of growing concerns about inflation. Bernanke kept up his tough anti-inflation talk on Tuesday but stressed many other problems that could short circuit economic growth. He seemed to be keeping his options open in terms of rates. Given all the risky cross currents, economists believe the Fed will leave rates alone when they meet on Aug. 5.
Righting wobbly financial markets is key to getting the economy back on track, he said.
"In general, healthy economic growth depends on well-functioning financial markets," Bernanke said. "Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority," he said.
But the heart of the economy's troubles is still housing, reports CBS News business correspondent Anthony Mason.
When asked by Sen. Robert Menendez, D-NJ, if he could predict when the housing market would reach rock bottom, Bernanke could not.
"I have to say there's uncertainty about the equilibrium level that house prices will reach."
Strengthening regulatory oversight of Fannie and Freddie, Bernanke said, is "job one." Congress is moving ahead on a broad housing rescue package that includes provisions to tighten regulation over the two companies. Bernanke said legislative efforts to help stabilize the housing market - the biggest threat to the economy - are of vital importance.
Bernanke, in the first day of back-to-back appearances on Capitol Hill, said investors are nervous in general because of the cloudy outlook for the economy and credit conditions, feeding a vicious cycle that can be hard to break.
"Many financial markets and institutions remain under considerable stress, in part because the outlook for the economy and thus for credit quality, remains uncertain."
The Fannie and Freddie troubles came on the heels of the failure of IndyMac, a big bank. "Its failure ... was inevitable," Bernanke said because the bank was weighted down by low-quality mortgages. "All banks are being challenged by credit conditions now," he said, adding that the Fed is keeping close tabs on the nation's banking sector.
And, earlier this year, a run on investment bank Bear Stearns pushed the company to the edge of bankruptcy and into a takeover by JPMorgan Chase, which was backed financially by the Fed. That was a controversial move that prompted critics to call it a government bailout, putting taxpayers money at risk.
Bernanke defended its decisions in the cases of Bear Stearns as well as Fannie and Freddie, and rebuffed claims that the government is helping Wall Street at the expense of Main Street. If problems aren't contained, they can ripple throughout the economy, hurting everyone, he said. "Financial stability is critical to economic stability."
The Fed, in new projections, now believes inflation will be higher this year than previously thought, with prices rising as high as 4.2 percent under one inflation measure.
Growth for the year will be sluggish - at best 1.6 percent growth - but not as bad as previously forecast, helped by the government's $168 billion stimulus, including rebates. The unemployment rate, which could rise as high as 5.7 percent this year, is the same as earlier projections.
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Michelle Obama tells how her role as the First Lady has changed her perspective.
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See all 257 CommentsGo to www.congress.org . Enter your ZIP+4 to get a list of YOUR elected representatives.
CLICK ON EACH NAME, and check the rep''s bio.
VOTE AGAINST anyone who was born 1946-1957.
CLEAN OUT THE BABY BOOMERS. SIXTEEN YEARS OF BABY BOOMER GOVERNMENT HAS BEEN A DISASTER.
SIXTEEN YEARS IS ENOUGH!
Go to www.congress.org . Enter your ZIP+4 to get a list of YOUR elected representatives.
CLICK ON EACH NAME, and check the rep''s bio.
VOTE AGAINST anyone who was born 1946-1957.
CLEAN OUT THE BABY BOOMERS. SIXTEEN YEARS OF BABY BOOMER GOVERNMENT HAS BEEN A DISASTER.
SIXTEEN YEARS IS ENOUGH!
SIXTEEN YEARS OF BABY BOOMERS.
Slick Willy is a Boomer. Dubya is a Boomer. Hillary is a Boomer. Arnold Schwarzenegger is a Boomer. Joseph Hazelwood is a Boomer. 60% of Congress are Boomers.
I THINK THAT EXPLAINS EVERYTHING...
SIXTEEN YEARS OF BABY BOOMERS.
Slick Willy is a Boomer. Dubya is a Boomer. Hillary is a Boomer. Arnold Schwarzenegger is a Boomer. Joseph Hazelwood is a Boomer. 60% of Congress are Boomers.
I THINK THAT EXPLAINS EVERYTHING...
Neither party works for the people so get used to it
If you haven''t figured it out by now I don''t know what else to say.
We all remember the Deocrats gloating that they took the Republican''s majority away in both houses of Congress. Pelosi pledged "The most ethical government ever." REMEMBER???
The were gloating then. THEY ARE DENYING IT NOW.
THE DEMS DON''T WANT TO ADMIT THAT THEY HAVE BEEN IN CONTROL OF CONGRESS DURING THE MOST RAPID ECONOMIC DECLINE IN DECADES!!!
I agree with "endorfempire" Bush is playing games to make Dems look bad.
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No, that was me. And it was A JOKE.
Do you REALLY believe there''s some evil right-wing conspiracy to sabotage our country intentionally just to BLAME IT ON THE DEMOCRATS????
You must be some kind of paranoid whacko to believe THAT conspiracy theory... LOL!
Go to www.congress.org . Enter your ZIP+4 to get a list of YOUR elected representatives.
CLICK ON EACH NAME, and check the rep''s bio.
VOTE AGAINST anyone who was born 1946-1957.
CLEAN OUT THE BABY BOOMERS. SIXTEEN YEARS OF A BABY BOOMER GOVERNMENT HAS BEEN A DISASTER.
SIXTEEN YEARS IS ENOUGH!
not long after Democrats took over Congress, things started to go South. It is almost as if, on cue
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AHA! THAT''S IT!!!
As soon as the Republicans lost their majority in Congress, Bush started SABOTAGING THE COUNTRY to make the Democrats look bad!
Then the "neocons" on the Internet could start blaming the Democrats to make them lose the next election!
IT''S ALL A CONSPIRACY AGAINST THE DEMOCRATS!!!
well I checked and Democrats have not taken over Congress
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Gosh, I just checked, and YOU''RE RIGHT!!!
So, then, what was with Pelosi and her boast to be "the most ethical government ever" when SHE thought the Democrats had taken control?
Was she DELUSIONAL???
heheh that is silly, clearly from someone unfamiliar with investing. Smart investors do not "buy low, sell high" because it is impossible. Highs and lows can only be seen looking back.
Posted by andor3
Nothing could be further from the truth. It is very simple to determine when stocks are high and low. This information is available daily to any investor and the internet makes this especially easy. All of the math is done for you. Granted, it is impossible to predict the absolute high or low for the year but it is easy to come close. Just as good mechanics or carpenters are skillful, good investers also are skillful. There is nothing mystical about investing.
heheh that is silly, clearly from someone unfamiliar with investing. Smart investors do not "buy low, sell high" because it is impossible. Highs and lows can only be seen looking back.
well I checked and Democrats have not taken over Congress, at least not at any recent time. You mean because they have a slight majority?
Time to stop playing blame politics.
a barrel and the rest goes toward the national debt. Write it into the lease.
Kinda like killing two birds with one stone.
Further any pollution clean up would be paid for by the oil companies completely.
Posted by rharrin1
I like your formula. Without knowing the cost of buying, refining, and marketing gasoline, we will just arbitrarily pick a number from a hat. Without knowing you, your needs, or your income, why don''t we just cut your income in half. Certainly, you should be able to live on half of your current income. Get the point?
Posted by OneWorldUSA
This is a lesson many people need to learn. My brother-in-law had the spend now and worry about it later attitude. This attitude landed him in debt which led to bankruptcy. Sadly, he never had a pot to pee in to use an old phrase.
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