Transcripts For CSPAN2 Ben Bernanke First Responders 2024071

CSPAN2 Ben Bernanke First Responders July 13, 2024

In 2008 and been burning he was head chair, he had to create one from scratch. A few of us expected successes would need to refer to it so soon but for all of us, left a copy for jake powell to consult. I recommend for people on this call if they are interested in very book called firefighting which is a summary of the crisis is one called First Responders which gets deep into the individual programs. I recommend everyone have a look at it over the next couple weeks. Been among other things as interesting as the economic historian. What we are experiencing now, put that in context, give us a sense of what will determine how deep this recession will be, perhaps how long it will last, how effective the fiscal and Monetary Policy responses been and what is likely to come and whether the covid19 recession will leave longlasting scars on the us and global economy. I will turn it over to ben for his remarks after which david wessel will host questions and then it will be instructions on how audience members can ask their own questions so over to you and thank you for joining us. Thank you for joining us this afternoon. Seems like a long time ago but january and february we had a Strong Economy with 3 unemployment rate. We are hopeful the strength of that economy will provide moment him to get to this tough period. What has happened is the world has been hit by the covid19 virus which is doing great damage from an Economic Perspective the fact that nonessential businesses are being shut down totally is having an enormous effect on Economic Activity. People are not shopping not working, people are not going to school, we will see the effect of that in a data very soon. You need to keep the data in perspective. If gdp in the Second Quarter is 10 lower than in the first quarter, an annual basis multiplied by four, very possible we will see gdp numbers in the Second Quarter an order of magnitude minus 38 or greater, likewise unemployment is hard to measure in the shortterm. People furloughed from the company, are they unemployed . We will see dramatic numbers but we wont know for a while how serious or deep this phenomenon is going to be. People made comparisons to the Great Depression. Its not a good comparison, the depression was 12 years long. It came from financial crisis, came from manmade, human made errors and decisions. This is more like a Natural Disaster and the response is more like emergency relief any it is a typical stimulus or antirecessionary response. Having said that, the critical factor in terms of how bad this is going to be, how much imprint it will be on the us economy is its duration, how long will it last, the longer it lasts the more existing businesses will fail financially, close their doors, the longer it lasts for more people will lose their jobs and lose their association with their former employers, the longer it lasts, more disruption it will be in harder agreed to come back. The duration will be cortical, the most important determinant of the duration of the Public Health response. We are currently in shutdown because we are trying to bend the curve, get the rate of new cases low enough that people can feel confident the system can handle the cases. Add palliatives, medicines and treatments, we want to test and trace, we ultimately want to be able to feel that people can go back to work safely and that is going to depend more than anything else on the Public Health response and there is great question about how that is going to go. One scenario is we partially open up the economy over the summer and perhaps in the fall there is more infection, shut down part of the economy again so overall it could be a very bad year for the us economy but the Public Health response and our ability to make sure hospitals have the equipment we needed the scientific establishment is putting all its resources into addressing this disease will be the most important determinant of how long and deep this downturn is. Having said that there are other components to the response, let me talk about the fiscal response and spent most of my time on how the Federal Reserve is responding to this crisis but fiscally, we are not really talking here about a stimulus package because people cant go out and shop. We are talking emergency relief, making sure people can survive this period, businesses that are losing revenue can pay their bills. And partially clear sounded. We store Economic Activity. That was a big part without the Fiscal Program that addresses health needs. And the Fiscal Program trying to provide life support, with a better grip on the disease. The direct payments to individuals, in this period. Are we getting money with people fast enough . And more is coming later. It is the right idea to get people to this period. That involve some grants in the airline industry. They remain solvent so they can up again as the Health Situation is better. The fiscal policy response which is an emergency relief package. There are logistical issues, it has the right shape. I suspect there will be more coming later as we help the economy get back to full employment and i would also add that this will be debtfinanced which in this circumstance is probably appropriate which is why we have the capacity to deal with these kinds of crises. Let me talk the remaining few minutes about the Federal Reserve which has been extraordinarily active and i commend jay powell and his colleagues for being very proactive in trying to address concerns in the economy. The fed has done basically 3 types of things and each of which has an Important Role in supporting our Financial System and our economy, the first is supporting market functioning and providing liquidity. This is what Central Banks were created for, what the fed was set up for in 1913 and is listening may know the fed has been dealing with liquidity issues going back into last year when the markets were destabilized, putting liquidity in the system as early as last fall but since then, with the pressures on Financial Markets coming from the uncertainty associated with this crisis, theres been a lot of destabilization, the fed has responded in a big way, buying large amounts of treasuries and mortgagebacked securities to restore functioning and those quick markets, continues to put cash into the system to try to make the money markets work better, discount window so banks can borrow at one fourth of one . And and one of the problems around the world is to take place, and stabilizing money markets, and swap operations with 14 other Central Banks. We found ways to provide them with dollars they can use in their economies to stabilize their Financial Systems. And the fed in this instance still set up swap, once again the fed will be acting as a letter of rest resort, not just us banks and financial institutions. Other countries besides the 14 can pledge the treasuries they hold get dollars, get cash and provide liquidity is needed in their own economies so the fed is acting very aggressively to make sure theres enough cash and liquidity in the system. That is the first line. Secondly, the fed has been aggressive on Monetary Policy, they lowered Interest Rates over the summer, cut rates three times as insurance and that seemed to be what the doctor ordered so to speak and the Recession Risk at the time fell and looked like the fed achieved a soft landing and now we have a different situation, the fed cut rates down to the minimal 025 basis points we saw in the years after the financial crisis. It has issued Forward Guidance saying we are going to keep rates at 0 until the economy is back on track and inflation is moving back to 2 . It will be quite a while and asset produce doing 500 million of treasuries, 200 billion of mbs mortgagebacked securities of been undertaken that will transmogrify into quantitative easing helping keep rates low and monetary positions easing. This is a 2stage process, making it easier to borrow so they continue to survive. It is not time to to relate spending on bipartisan houses, that will have to wait for the Health Situation that is better. At that point Monetary Policy will begin to perform its former function. Finally and most innovatively the fed has been intervening substantially in credit markets. Credit markets have been very disruptive by the crisis, by the fact that people are so uncertain, and so the crisis began, many of the credit markets were disruptive, and it added quite a few innovations of its own. Following in the 2008 playbook has done three things, it created a commercial paper facility which provides commercial paper, shortterm lending to corporations to help them finance their inventories, that is something we did in 2008, it is already running. Secondly theres money Market Liquidity Fund that they brought up. And they reduce pressure on money markets. We have seen some run phenomena on money market mutual funds and this has been helping there as well, something we did in 2008 and the third facility we had, planning to reintroduce but not yet, the term assetbacked facilities lending facilities used to buy packages of credit, credit cards, auto loans, Student Loans and make those markets more effective. These announcements, together with treasury and mortgagebacked securities improved credit market functioning considerably. Going beyond that the fed is going to use it 133 Emergency Powers which we used in 2008 for the First Time Since the depression the fed in general has limited ability to buy assets and make loans, but under emergency conditions socalled unusual exigent conditions that with permission of the treasury secretary the fed can essentially lend to anybody with 133 power and based on that adding a whole number of lending facilities that will try again to ensure that businesses can borrow cheaply and effectively in order to maintain their survival through this period so what is coming out, there are but two corporate facilities, one that is going to lend directly to corporations, essentially making loans or buying bonds to help them survive the period, there is a secondary facility to provide existing bonds trying to improve functioning of the credit markets in the Corporate Bond markets and thirdly, this is an important and difficult one, departing quite substantially from past experience, the fed is also going to be introducing the main street business lending program. Main street is a misnomer because it is for middle size firms, 50010,000 employees and what the fed will be doing and we dont know the details yet but presumably they will be asking banks to make loans to midsize firms in the fed will be writing cheap liquidity and perhaps providing protection against risk so banks will be incentivized to make loans on good terms to these midsized firms, the smallest institutions, the smallest businesses are eligible for loans from the sba, the Small Business administration that began this week, logistics are so important, there have been some snafus in terms of getting the money out. I hope that will get straightened out] is supposed to provide the spa program with cash to smallest businesses on favorable terms and those loans are at least partially forgivable if the Companies Maintain their payroll. The fed is hoping, they announced today and yesterday that will buy sba loans from banks or provide secondary marketplace loans making the more liquid and banks more willing to make those loans lose the thing to emphasize is what the fed can do is reinforce the private credit markets. They are dysfunctional because of leveraging because of uncertainty. The fed can come in and replace those markets to some extent or strengthen those markets and try to bring private vendors back into those markets. The fed does not give away money, the 133 requirements do require the fed to pay collateral and intends to be repaid but in order to give the fed some protection a big chunk of the money in the Fiscal Program, 465 billion provides equity for the feds lending programs so that if they do lose money it will be covered by this these treasury funds. There has been progress already and weve seen credit markets improve. It will depend on how quickly the Public Health situation improves and that will depend on the logistics of distributing equipment and gear, beds, ventilators and the scientific effort that we really need to get control of this. Let me point out talking about the United States, this is a difficult situation because it is a global situation, almost every country in the world is suffering from this pandemic and almost all have chosen to significantly reduce Economic Activity so this will be a global recession. The situation is being worsened by a strong dollar, falling Commodity Prices, capital outflows from those countries. We may well see emerging market crises and global recession as well as in the United States. We have a hard roll ahead but i am pretty pleased overall with the fiscal and monetary responses we have seen. We are going to need more but at least those authorities have done what they can to help our economy stay functional until the Public Health situation gets better. I will stop there and be happy to answer any questions. Thank you very much. We have a number of questions already but feel free to add to the list on twitter, s j covid19 economy. The fed is increased its Balance Sheet 6 trillion so it will be twice the size it was in 2014. Is there a limit how much the fed can create a reserves to purchase us treasuries and all these emergency facilities . Is there a limit to how much the treasury can borrow to finance this . Guest technically there is not a limit to how big the Balance Sheet can get. At 6 trillion this would be 30 or less of us gdp. In japan i dont know the exact number but 90 of gdp, the size of the bank of japans Balance Sheet so it could be bigger. Much of the increase is temporary. A lot of the commercial paper facility are shortterm loans, and as things normalize those loans will be paid back in the fed Balance Sheet will shrink. But i think the fed has capacity to increase its Balance Sheet and appears willing to do so significantly and that is appropriate. I dont think theres a real danger from that. I dont think for example that inflation is going to be a risk. If anything low inflation will be more of a concern then too high inflation. As far as borrowing is concerned the federal government is borrowing a lot, this is when that Borrowing Capacity is so valuable when you have a National Emergency which this is. Paying for this with taxes would be counterproductive because it would d press buying power when the economy needs buying power. I think the question of sustainability is a tough one. There are issues as the population ages and cost of medical care go up and we see projections of the federal debt that are very disturbing over the next decade or 2 and we need to think hard how to get control of that trajectory but in the near term dealing with a crisis of this magnitude this is an appropriate approach and i will note finally that Interest Rates being almost 0 means the interest burden associating with this borrowing is quite low even though the number of dollars borrowed is high. Back to the inflation point, some people look at what is going on, huge increase in the federal deficit, low Interest Rates, the fed creating a lot of reserve and think surely this will increase inflation may be more than we want. You dont seem to think that is the case. How come . There are supply and demand elements of this crisis was on the supply side you are seeing for example some types of goods in short supply, some supply chains being disrupted so there are some supply side effects that raise prices for certain goods and services. Over although think about what is happening to the demand for major industries, what is happening to the demand for Airline Seats or restaurant meals. Because people are staying home and because it will be a while before they are back to normal activity and when they do come back to normal activity they will have exhausted their financial reserves spending is going to take a hit so the net effect will be disinflation area. That is what jay powell said in his press conference and one way to do that is what is happening to Commodity Prices which have collapsed so i think overall monetary and fiscal stimulus will not sufficiently compensate to get us back quickly to full employment and the risk will be that in the short term inflation will be below the feds target is the fed will like to get back to 2 or slightly above. I think at this point inflation is not a high risk. Host you are anticipating a sharp the shaved recovery . Guest i am not. The reason im not is because of the apparent trajectory of the virus

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