Bernanke Pushes for Second Stimulus Package

The hard punch, such as it was, came at the end. In testimony this morning before the U.S. House of Representatives Committee on the Budget, Federal Reserve Board Chairman Ben Bernanke concluded by endorsing, to the understated extent that a Fed chairman can, the idea that Congress should pass an economic stimulus package. Bernanke (pictured) began by summarizing recent financial developments, describing the ongoing crisis as “the aftermath of a credit boom characterized by underpricing of risk, excessive leverage and an increasing reliance on complex and opaque financial instruments that have proved to be fragile under stress.” The Fed chairman also noted the soon-to-be-implemented Commercial Paper Funding Facility, which, as he put it, “will provide a backstop to commercial paper markets by purchasing highly rated commercial paper from issuers at a term of three months.” Then, following a recap of the financial markets, Bernanke acknowledged (as if this were merely a rumor) that Congress is considering “a second fiscal package.” Hedging his remarks in classic Fed-speak, he then got to the point, “All that being said, with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate.” Bernanke then described the “design principles” that “may be helpful.” These he enumerated as (paraphrasing generously) making sure the package works while the economy is still weak, maximizes its benefits per dollar spent, is monitored by Congress, doesn’t increase the long-term budget deficit more than needed and, in addition to boosting overall economic activity, targets “specific factors that have the potential to extend or deepen the economic slowdown,” such as the credit market. Last week, following a closed-door meeting with several leading economists, congressional Democrats announced a stimulus package, costing as much as $150 billion, that would likely include spending for infrastructure projects, financial help for states struggling with falling revenues, extended unemployment benefits and possibly further tax cuts or rebates to help kick consumer spending back up. House Republicans are working on their own, less costly plan, which would push offshore drilling, cut capital gains taxes and allow individuals to postpone withdrawals from their IRAs past the age of 70 1/2, so they’re not forced to take losses from investments that are currently in the tank. What effect, if any, Bernanke’s remarks will have on Congress’ deliberations about a stimulus package, or on public pressure for them to pass something, is anyone’s guess. But if CPN can lapse into Fed-speak momentarily, it might not be untoward to suggest that the imminence of the impending presidential election represents a factor whose effect on such Congressional deliberations could be drastically greater than those engendered by the Federal Reserve chairman’s comments. Perhaps.