Speaking before a joint Congressional Economic Committee, Federal Reverse Chairman Ben Bernanke suggested that the first step to initiating confidence in the private market is for Congress to create a clear blueprint for the housing sector.
"The housing sector has been a significant driver of recovery from most recessions in the United States since World War II," Bernanke said. "This time, however, a number of factors–including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of "underwater" mortgages (on which homeowners owe more than their homes are worth)–have left the rate of new home construction at only about one-third of its average level in recent decades."
Although there is near not a near term solution to the issues with the GSEs Fannie Mae and Freddie Mac, Bernanke stated that laying out a clear path for dealing with the entities and the large overhang of distressed properties would go a long way towards encouraging private-label securitization participation in the housing finance market.
Overall, Bernanke noted that economic growth remained sluggish and the economy faces on-going strains. Internally, he pointed to the lack of job growth, credit remaining tight due to risk aversion and continued cuts by local and state governments. Externally, Bernanke said that growing concerns about sovereign debt weighing on the European banking system, highlighted by Greece, is adding stress to the global financial markets.
Bernanke called on Congress to consider four main objectives in setting tax and spending policies to put the U.S. economy on a more stable and sustainable path. First, is to focus on and achieve long-term fiscal sustainability. Stating that the current budget is not on a sustainable path, he said more needed to be done beyond the current spending caps and $1.5 trillion in cuts targeted by the Joint Select Committee on Deficit Reduction.
Second, he warned Congress to avoid fiscal actions that result in impeding ongoing economic recovery. His third objective is to shape fiscal policy to promote long-term growth and economic opportunity. To achieve this, he said the nation needs to think carefully about the impact of federal spending priorities and the design of the tax code on the economic productivity and vitality over time. Lastly, Bernanke pointed to the continuing budget debates and challenges in reaching budget decisions. The process for making long-term budget decisions clearly needs to be improved, he said. Decisions need to create greater predictability and clarity to help avoid disruptions to the financial markets and economy.
Bernanke summed up his speech calling on policymakers to work with the private sector to set policies focused on growth. He acknowledge that the Federal Reserve had limits in its ability to resolve economic problems.
"Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy," he stated. "Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector. Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies–pertaining to labor markets, housing, trade, taxation, and regulation, for example–also have important roles to play."
