Bernanke's testimony on Fed's monetary policy

Financial Crisis Posted on

The following are highlights of Federal Reserve Chairman Ben Bernanke's testimony on Wednesday to the House of Representatives Financial Services Committee on the Fed's semiannual report on monetary policy and the economy.

BERNANKE ON NEED FOR POLICY CERTAINTY:

"Given the enormous losses, given the weakness of the economy, it would be surprising if investors felt that the situation was a safe one for them to be investing in. Having said that ... more certainty in policy the better, the sooner the better, would be good for bringing more private capital back into the system. I do believe that the Treasury (bank) program is an important step in that it is a comprehensive program. It has different components that, taken together and executed properly, I think will be very helpful in stabilizing the banking system and making it more attractive for private capital to come in."

BERNANKE ON CITIGROUP:

"In the case of Citi, we will see how their test works and we see what evolves and if they in fact have to convert any existing preferred (stock) into common (stock) then there could be a more substantial share of ownership of Citi by the U.S. government. But I would like to clarify. This debate over nationalization kind of misses the point. There is really two parts to the government's program. The first is to ensure stability and ability to lend and that involves supervisory review and providing enough quality capital so that the banks will have the capital base they need in order to make loans. But the other part is to use the already very substantial powers that we have through the supervisory process, the TARP through any ownership that there is through these shares to make sure that banks do not just sit there, the don't misuse the capital, they don't continue taking excessive risk. But instead they do whatever restructuring is needed to bring that bank into a position of viability. There seems to be no need to do any radical change. Nationalization to my mind is when the government seizes the bank, zeros out the shareholders and begins to manage and run the bank and we don't plan anything like that. It may be the case that the government will have a substantial minority share in Citi or other banks but again we have the tools between supervisory oversight, shareholder rights and other tools to make sure that we get the good results we want in terms of improved performance without all the negative impact of going through a bankruptcy process of some kind of or seizure which would be disruptive to the market."

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