TOPICS > Economy

At Forum, Fed Chairman Calls for Patience on Stimulus

July 28, 2009 at 6:20 PM EDT
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In part two of Jim LehrerÆs conversation with Ben Bernanke, the Federal Reserve chief discusses the state of the Obama administrationÆs economic recovery efforts, and the central bank's efforts to help homeowners facing foreclosure.


JIM LEHRER: Part two of our NewsHour forum with Federal Reserve Chairman Ben Bernanke. He spoke Sunday night with a group of citizens from and around Kansas City, Missouri. We broadcast the first section last night. Here now is the second part of “Bernanke On the Record” from the Federal Reserve Bank of Kansas City.

JIM LEHRER: All right. Let’s move on now to the recovery. And the first question to James Thomas, to the recovery itself now, to the present.

JAMES THOMAS: James Thomas, recent economics graduate from UMKC. With the first phase of the stimulus bill in effect now — in my opinion, failed — what do you think worked and didn’t work?

BEN BERNANKE: Well, I would say that it might be a little bit early to make that judgment. First of all, let me say one other thing, which is the stimulus package is the administration and Congress. The Federal Reserve’s got nothing to do with it. I mean that’s — you know, it’s a different part of the government.

But having said that, I think we have to wait a bit longer. The stimulus package is a big $787 billion package, but something like a quarter of that is getting spent this year, and not even all of that is actually going into the system this year, so most of the money that’s in that package is in 2010. So it may or may not succeed, but I think we’ve got to give it a bit more time.

JIM LEHRER: Bob Litan, you have a similar question, a follow-up question on that.

BOB LITAN: I’m Bob Litan from the Kauffman Foundation.

It’s widely known among economists that the employment situation lags the general economy, that you really need the economy to grow at something like 2.5 percent a year in order to absorb the new workers and also to absorb productivity. So that means unemployment’s going to continue rising even as the economy starts to recover. Can you give us any idea of when unemployment’s going to peak out and then at what level?

BEN BERNANKE: Well, nobody really knows for sure, of course. Economic forecasting makes weather forecasting look like physics.


But you’re absolutely right. It takes about 2.5 percent growth to absorb new workers, keep the unemployment rate about constant. Right now we’re seeing growth in the second half of the year, but our best guess, and it’s only a guess, is that growth in the second half of the year will be about 1 percent on an annual basis. So that’s not enough to bring down the unemployment rate.

So our projections — the members of the Federal Open Market Committee, which is the committee that sets monetary policy, puts out forecasts or projections four times a year which are publicly available, and our projections suggest that the unemployment rate will probably keep rising, probably a bit above 10 percent, it’ll peak early in 2010, and then begin gradually to come down.

We could be wrong. It could be a stronger recovery than that. But you’re absolutely right that, even after the economy starts to grow again, and we’re hoping to see that in the next third and fourth quarters, it’ll be a while before the labor market, the job market, is back to where we want it to be.

The end of the crisis

JIM LEHRER: Sue Drakeford has a question that's also related to that.

SUE DRAKEFORD: Hello. My name is Sue Drakeford. I'm a banker at Hillcrest Bank and a board member with the Asian American Chamber of Commerce.

When is this going to end? That's my question.

BEN BERNANKE: That's a great question, also. Well, there's a healing process that has to take place. We've made a lot of progress.

As I said, last September and October, we were in the middle of the worst financial crisis at least since the Great Depression. We've seen a good bit of progress in the financial markets. Banks have largely stabilized. The stock market, you know, is up a good bit in the last few months. Credit markets are beginning to open up again.

So we're seeing progress in the financial markets, which is very encouraging, and suggests that we are going to start seeing some growth in the economy.

We're going to expect to see growth in the economy in the second part of this year, then beginning to pick up in 2010, but as the previous questioner indicated, it probably will be longer than that before unemployment comes down to a level that we find acceptable.

So the Federal Reserve has been -- I'll be very clear. The Federal Reserve has been putting the pedal to the metal. We have the interest rate as low as it can go. We are putting everything we can into strengthening credit markets. We are buying up mortgage securities to bring mortgage rates down and get people into houses.

So we're doing everything we can to support the economy, and we hope that that's going to, you know, get us going next year sometime.

Now, I want to say one other thing, which is that recessions happen. They typically last one to two years. They're unpleasant. Financial crises can make them worse, and that's what we're seeing today. But I have tremendous confidence in this economy and in the American people.

I think Americans are very hard-working. They're innovated and creative, and they're very ambitious. And we have a market system that under normal circumstances rewards those valuable traits.

On top of all of that, one of the small silver linings of all this is that people are starting to save more, because they've seen what happened to their 401(k)s and to their credit positions. So I have a lot of confidence that within, you know, a few years, that we will be not only back on track, but that we will be growing strongly again.

And I think this economy cannot be kept down. We will try to get through this process. It's going to take some patience. But I think in the longer term this economy will go back to what it has been, which is the most successful economy in the world.

JIM LEHRER: Amar Singh, you have a question about inflation, which, of course, is related to the recovery that's going on now.

AMAR SINGH: Yes. I'm Amar Singh, and I run a small I.T. company specializing in business intelligence. My question relates to the -- mounting national debt will probably cause the U.S. dollar to become weaker versus other major currencies. So what are you going to do to protect the dollar so that all of a sudden all the imports we consume don't become too expensive, plus rises the inflation?

Strong dollar for a strong economy

BEN BERNANKE: So different parts of the government have different responsibilities here. The federal debt, as I'm sure you know, the deficit this year is almost $2 trillion, the largest deficit probably since World War II. Next year it'll still be over a trillion. So these are enormous deficits that are adding to the national debt.

Of course, this is the responsibility of the administration and Congress, not -- the Federal Reserve has nothing to do with the federal debt.

But I think that, you know, as we look at that, we see -- I think it's important to say that even though I don't think we could have avoided having a big deficit this year or next year, given the weakness of the economy, given the financial problems and so on, it is very, very important for the Congress and administration to develop a plan and say, "Here is how we're going to get back to fiscal sanity."

As far as the Fed and the dollar is concerned, the Fed supports the Treasury's strong dollar policy. We think the dollar should be strong. And the way we think -- the best way we think to get a strong dollar is to have a strong economy. When the economy is strong, then there's a lot of good investment opportunities. Foreigners want to invest here, and that causes the dollar to rise.

So our whole strategy right now is to get the economy out of the doldrums and back into a growth path that will attract foreign funds and will get the dollar and keep it strong. So that's our strategy, a strong economy for a strong dollar.

JIM LEHRER: Barbara Stillman, you also have an inflation question.

BARBARA STILLMAN: I'm Barbara Stillman, and I've been retired for a number of years. I wonder what indicators you are considering in determining whether inflation is going to become a concern.

BEN BERNANKE: We look at -- the question is, how do we tell what inflation's going to do?

Well, first of all, we look at a lot of indicators. We look at commodity prices, including energy prices, for example. We also look at the amount of slack in the economy. Right now with 9.5 percent unemployment and with markets as weak as they are -- that is, the product markets -- it's very hard for firms to raise their prices and for workers to raise their -- ask for higher wages. And in fact, we're seeing prices and wages being very, very moderate.

So our anticipation is that, given the softness of the global economy, that except possibly for some fluctuations in energy prices, we expect for the next couple of years that inflation will be quite low.

Now, coming out of this episode, as I've mentioned, the Federal Reserve has brought interest rates down close to zero. We have put a lot of money into the economy through our lending program. So we've had a lot of stimulus, which we're trying to use to make the economy grow.

Once the economy starts to grow and begins to move ahead, then it will be very important for the Fed to unwind, raise interest rates, bring that credit back, bring the money back, so that we don't have an inflation problem down the road. We are very confident that we have all the tools we need to take those steps at the appropriate time so that we don't make the mistake of having inflation ultimately.

JIM LEHRER: Now, Jared Campbell, you heard what the chairman said about the stimulus connection, but you have a concern about the stimulus. You have a question for the chairman about that.

JARED CAMPBELL: I do. Good evening. My name is Jared Campbell. I was laid off at the end of last year. I'm happy to report that I've started working full time last month.

In regards to the stimulus, my question is: Has enough money been released this year for the impact to be what it needs to be to get the economy started again?

BEN BERNANKE: Well, first, I'm glad you found work again. That's good to know.

The Congress and administration, again, who put together the stimulus package, made a number of decisions which had to do with how quickly the money was going to get out versus other criteria.

So, for example, there were a number of tax-rebate elements in that bill, and that money goes out really quickly and then people spend it over a few quarters, so that was pretty quick. But there were other parts of the stimulus -- infrastructure construction, for example, building highways -- that kind of thing takes longer. And so if you're going to have that in your program, it takes longer to get out into the economy.

Now, given that the unemployment rate is still likely to be reasonably high next year, unfortunately, I think having that stimulus next year will actually be helpful and will create some more jobs. So those were the decisions that Congress made. We'll have to see how effective that program is.

Help for homeowners

JIM LEHRER: Jack Craft has a question about foreclosures.

JACK CRAFT: Given the significance of how...

JIM LEHRER: Name and...

JACK CRAFT: I'm Jack Craft. I'm a practicing lawyer in Kansas City.

Given the significance of the housing crisis, is there any way for the Fed to involve itself in incentives for either the homeowners or the servicers of mortgage to prevent a deterioration of prices merely because of the foreclosures themselves?

BEN BERNANKE: Foreclosures are a very big issue. We've put a lot of attention on that issue.

Foreclosures are bad not only for the borrower, for the homeowner, but they're also bad for the community. When you have a lot of foreclosures in a neighborhood, that brings down property values for others. It brings down tax collections for the town.

As you pointed out in your question, lots of foreclosures, putting a lot of empty houses on the market, is also bringing down house prices, which is, again, hurting homeowners across the country. So there are a lot of bad effects of foreclosures over and above the problems that borrowers have.

Now, at this point, there are a number of different approaches to dealing with foreclosures and their consequences. The government -- not the Fed specifically -- but the administration and the Congress now have two anti-foreclosure programs.

One is called Making Homes Affordable, which gives subsidies to servicers -- reduced interest rates -- to let them help people stay in their homes. The other one's called help for homeowners -- or Hope for Homeowners, and that -- what that does is bring down the principal balance on mortgages so that people aren't underwater having a principal balance that's greater than the value of their house.

The Federal Reserve was very involved in developing those programs, and we have -- our economists helped to develop them. And in addition, we are encouraging very strongly the banks that we supervise to ramp up their staffs so they can take advantage of those programs and help reduce foreclosures.

I would say also that the Kansas City Federal Reserve bank and the whole Federal Reserve system is very much involved in community activities, community work. The Federal Reserve banks are working closely with NeighborWorks, which is a nonprofit, to help preserve communities and neighborhoods and stabilize them even though there may be a lot of foreclosures. So how do you do that, prevent the foreclosures from causing a lot of problems in a neighborhood or in a city.

So we're addressing it in a lot of different ways. Unfortunately, the foreclosure problem is still very large. We expect about 2.8 million Americans to receive foreclosure notices this year. We hope less next year. But it's one of the key things to getting the housing market to stabilize and getting our economy back on track.

Best approach to foreclosures

JIM LEHRER: Jason Wood has a related question.

JASON WOOD: Thank you, Mr. Chairman. Jason Wood. I work with United Way around our 2-1-1 system in getting homeowners to access housing counselors.

I guess my question is more in light of the report from the Federal Reserve Bank in Boston in regards to some of the monies that have been released to help homeowners and more importantly, the money that's been given to servicers. The report stated that the money maybe would have been better used if it had been given to the actual homeowners rather than the servicers. I'd like to get your commentary and what your thoughts are in regards to that.

BEN BERNANKE: Yes. First, let me say that I'm glad to see you're doing counseling work. We found that having a counselor helps the borrower work with the bank raises the probability of success quite considerably, so keep up the good work.

The report you're referring to was a research paper done by some Federal Reserve economists. It doesn't represent an official position of the Federal Reserve. It's just a research paper.

But it addresses the fact that we don't have much experience with dealing with a foreclosure wave like this, and we don't really know necessarily what the best way is to address it. And their proposal is, instead of trying to restructure the mortgage, instead, help the homeowner for the short period of time that he or she needs help.

If you've lost your job, if you're sick, maybe you just need help for a few months and then maybe that you could go back to paying your regular mortgage. So that's the proposal they made.

That's not the approach the government has taken. The government has taken, as I just described, a restructuring approach, bringing down the payment or bringing down the principal. We're just going to have to see which ones of these programs work and what kinds of modifications we have to make going forward.

JIM LEHRER: Back in Washington today, senior officials of the Obama administration summoned top mortgage industry executives to a meeting and told them to ramp up their efforts to help more homeowners avoid foreclosure.

Tomorrow night, in the last part of our forum with Chairman Bernanke, we'll talk about future regulation and consumer protections. You can watch the entire event right now on our Web site at And a one-hour version, "Bernanke On the Record" will air on most PBS stations. Please check your local listings for the time.

And on Paul Solman's "Making Sense" Web page, see what former chairmen say about the power of the Federal Reserve. Also, there are lesson plans about monetary policy for teachers.