Bernanke Says Rate Increases Must Be An Option, No New Bubbles
Federal Reserve Chairman Ben Bernanke cracked the door open a bit more to the idea of raising interest rates if a new financial bubble emerges.
He also mounted a vigorous defense against critics who say it was the Fed's low-interest-rate policies over the past decade that caused the last housing bubble. Instead, he said, the problem was lax regulation, which permitted banks to issue a slew of exotic mortgages that households later had trouble paying.
"We must be especially vigilant in ensuring that the recent experiences are not repeated," Mr. Bernanke said in a speech Sunday at the American Economic Association's annual meeting here. Better regulation is his first line of defense against future crises. But the Fed also needs to "remain open" to using the blunt tool of higher interest rates to avert or pop future asset bubbles, Mr. Bernanke said, particularly if other approaches aren't working.
The Fed's views on asset bubbles are slowly changing. Earlier this decade, when Mr. Bernanke was a Fed governor, he and other central bank officials said financial bubbles weren't something the Fed could identify or pre-empt effectively. Its focus was on keeping inflation and unemployment low. Its bubble strategy was to mop up after a bubble burst with lower interest rates to prevent damage to the broader economy.
After a speech in November, Mr. Bernanke said, "never say never," when asked whether the Fed should instead use higher interest rates to pre-emptively prick future bubbles, and he later said he wouldn't rule it out. Sunday, he accepted that there might be situations that warrant such an approach, particularly if other methods aren't working, such as better regulation.
"We still have much to learn about how best to make monetary policy and to meet threats to financial stability in this new era," he said.
The Fed has pushed overnight bank-lending rates to near zero and has said it expects to keep them there for at least several more months because the economy remains weak and inflation low. Some private economists and officials in Asia and Europe have warned this could plant the seeds for a new bubble, though Fed officials have argued that market gains in the U.S. haven't gotten out of hand.
This year's meeting of economists from universities around the world and top government officials has been dominated by debate about the causes and consequences of the financial crisis.
While many economists here believe a recovery is under way, many are wary about its strength and staying power. Donald Kohn, the Fed's vice chairman, pointed to "lingering credit constraints" and cautious businesses and households as reasons to expect a slow rebound this year. While he said the Fed would need to begin withdrawing its stimulus from the economy "well before" it has returned to full strength, he gave no indication that a tightening was approaching any time soon.
Martin Feldstein, a Harvard University economist and former Reagan administration economist, is worried that consumer spending could wane as government stimulus wears off. "There is a significant risk the economy could run out of steam sometime in 2010," he warned.
Critics have said the Fed kept interest rates too low for too long earlier this decade, helping to fuel a housing bubble at the root of the recent financial crisis.
Mr. Bernanke acknowledged that monetary policy was accommodative not only in the U.S. but all over the world during this stretch. But he made a lengthy, professorial case -- detailed with 10 pages of charts -- against the idea that the Fed's interest-rate policies were the main problem.
For example, he noted that some countries such as Germany and Japan had looser monetary policies than the U.S. during this stretch, but didn't experience housing bubbles. Other countries such as Spain and Ireland had tighter policies but even bigger booms.
Mr. Bernanke pinned the blame on lax supervision of toxic mortgages by the Fed and other bank regulators, as well as excessive money going into U.S. assets from Asian investors. "Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term," he said.
Anthony Foxx Says He'll Be "Laser-Focused" On Bringing In Jobs Via Loans To Former Bank Employees
After Anthony Foxx is sworn in as Charlotte's new mayor Monday night, the Democrat said he will tackle the city's biggest problem: high unemployment.
Foxx said he plans to ask city staff and his colleagues on City Council to tweak a city loan program for small businesses. The program currently steers money toward fledgling businesses planning to open in economically distressed corridors of the city, such as North Tryon Street.
Foxx wants to prioritize the loans for what he calls critical businesses, such as banking. If a team of laid-off bankers have an idea for a start-up, Foxx wants them to have access to no-interest loans even if their office is in SouthPark.
"The current program is corridor-based," Foxx said. "I want it to be industry-based."
Foxx said the state has a program to retrain unemployed financial service workers, but he said there isn't a loan program to help them.
Foxx will become the city's first new mayor in 14 years and the city's first Democratic mayor in 22 years.
When Republican Pat McCrory became mayor in 1995, Mecklenburg's unemployment rate was 3.2 percent. The city was in the midst of a long run of prosperity, much of it fueled by the expansion of its two hometown banks. In his first address as mayor, McCrory said crime was his top priority.
The situation is different today.
The Charlotte area's unemployment rate in October was 12 percent, up from 11.8 percent in September. It's higher than the state average of 11 percent.
"The economy is the single most important issue for all of us," Foxx said Thursday.
Foxx said he hopes to have the small-business loan program tweaked this month.
The current program, known as the business equity loan program, has been around since the late 1980s.
A small business may have a $100,000 loan from a bank, but still need more money. The city can offer the business a low-interest loan that's no more than 25 percent of the total amount borrowed.
The requirement today is that the business locate in a city-designated economically distressed corridor.
The challenge of improving the local economy will be difficult for a mayor and City Council whose jobs are usually focused on meat-and-potatoes issues such as paving roads, hiring police officers and building affordable housing.
"It's mostly a cheerleading role," said UNC Charlotte political science professor Ted Arrington. "That's partially because the Charlotte mayor is a weak mayor, but also because there isn't a lot that the city can do."
Foxx said he also wants to assemble a team of business leaders to brainstorm ways to strengthen the economy.
One part of that would be how to better market some of the region's lesser-known industries, such as energy and biotechnology. McCrory started to do this in the last 18 months, touting the city's expanding energy-related economy in interviews.
Foxx said Friday he wouldn't discuss whether he would work with N.C. Gov. Bev Perdue to offer Bank of America incentives to stay in Charlotte.
"I will be laser-focused on keeping jobs in Charlotte," Foxx said.
Foxx said he also will appoint a group of civilians to review the city budget and look for savings.
Foxx will take office with something no Charlotte mayor has had: one party holding eight of 11 council seats.
The new council will have an 8-3 Democratic majority - the biggest advantage by either party since the council became partisan in 1977. The current council has a 7-4 advantage for Democrats.
Democrats David Howard and Patrick Cannon are replacing at-large council members Foxx and Republican John Lassiter, whom Foxx defeated for mayor.
McCrory said he's concerned about having one party in control of the City Council, County Commission and now the mayor's office.
"The big challenge is you have one dominant party - who will be the check on spending?" McCrory said. "The mayor's office was the only political balance."
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Sources: Wall Street Journal, McClatchy Newspapers, Charlotte Observer, Google Maps
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