Bernanke wants new stimulus package to ease credit crunch

by Tina Kells | October 20, 2008 at 01:54 pm

396 views | 2 Recommendations | 0 comments

Federal Reserve Chariman Ben Bernanke is asking that more taxpayer money be used in a new stimulus package designed to bolster stalled credit markets.

Bernanke made the announcement today stating that the credit crunch is hitting the economy much too hard and must be addressed. The second stimulus package would act to compliment the $700 billion bailout bill by putting Federal Reserve funds directly into the credit market.

Wall Street rebounded on the news that there could be further government intervention in the financial markets. The Dow Jones industrial average (DJIA) was up 413 points for the day, up nearly 5%, to close at 9,265.43. Other US markets were up slightly: the NASDAQ closed at 1,770.03, up 58.74 points; and the S&P went up 44.85 points to close at 985.40.

The news of Bernanke's proposed new stimulus package was not the only thing lifting Wall Street's spirits. An emergency meeting of OPEC called over the weekend to address the dropping price of oil boosted the commodity to $75.48 U.S. per barrel. Energy stocks also went up with the price of oil helping Wall Street make gains.

Congress should consider implementing a second economic stimulus package, Federal Reserve Chairman Ben S. Bernanke said today, advising that any such program should be designed to have immediate impact and promote access to credit.

Bernanke, testifying before the House Budget Committee, hardly gave a full-throated endorsement of using government taxing and spending, an approach embraced by many Democrats. But he was much more open to such steps than the Bush administration has been.

"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 said.

But he urged that any stimulus bill be "well-targeted" so that its impact would be felt soon, get maximum bang for the buck in terms of economic impact, and not increase the long-term deficit. In prepared testimony, he did not specify what sorts of programs would or wouldn't meet those criteria, though the spending on roads, bridges and other infrastructure favored by many Democrats may not pass that test because such spending tends to occur over many years. The White House has long resisted calls for a second stimulus package, arguing until recently that the first stimulus needed more time to have full impact. That position has softened as the global financial crisis has worsened, however, and officials have now signaled a willingness to consider stimulus proposals from Congress.

In related news, economists around the globe are warning that without relief, like the second stimulus package proposed by Bernanke, the global credit crunch will continue well into 2009. This announcement came as the International Labour Organization (ILO) predicted that 20 million jobs could be lost worldwide by the end of 2009 because of the credit crunch and resulting global financial crisis.

A month ago today, a global credit freeze – so severe that it seemed capable of pushing the world economy into a depression – prompted the White House to unveil a plan to pump hundreds of billions of dollars into the nation's financial system.

Despite some slight easing over the past week, interest rates remain at historically high levels, making it difficult for banks and corporations to obtain needed loans. Interest-rate spreads – a major yardstick for measuring credit flows – remain at heights not seen since the post-Cold War recession of the early 1990s.

Economists say it could be well into 2009 before the credit market begins to approach a semblance of normalcy. Unless the credit crunch is resolved, the current recession could be much deeper and longer than it otherwise would be. Already, the problems have caused stock markets to plunge worldwide.

The financial crisis could lead to record global unemployment with 20 million more people out of work by the end of 2009, International Labour Organization chief Juan Somavia warned Monday.

Estimates from the ILO indicate that the "number of unemployed could rise from 190 million in 2007 to 210 million in late 2009," said Somavia, marking the "first time in history that we pass 210 million."

The population of working poor living on less than a dollar a day could grow by 40 million and those on two dollars a day by over 100 million, added the ILO.

But Somavia said these projections "could prove to be underestimates if the effects of the current economic contraction and looming recession are not quickly confronted."

Thousands of jobs have already been slashed on Wall Street and other financial centres as banks collapse or are forced to merge due to the credit crunch.