The Bankwatch

Tracking the consumer evolution of financial services

Review of the US economy – Federal Reserve Bank of San Francisco

The shifts that must be made before recovery is accepted are nicely summarised here including the required reduction in debt.  Interestingly this comes after a few introductory cheerleading paragraphs suggesting recovery is already here.

At the Federal Reserve Bank of San Francisco Community Leaders Luncheon, San Francisco, California

As I have been emphasizing, the transition to full employment and the emergence of this new configuration of spending and production, and borrowing and saving, will take time. This rebalancing involves repairs to balance sheets, the movement of capital and labor across sectors of the economy, and shifts in the global pattern of production and consumption–adjustments that are likely to be gradual under any conditions. Moreover, the re-equilibration may be slower than might otherwise be the case because tight credit will limit the ability of some households and firms to make the necessary adjustments.

Then some additional remarks about the economy in general.

Government policies will be essential to supporting the smooth transition to more-sustainable economic growth with greater investment and exports. We must ensure that changes in taxation and regulation do not blunt incentives for business investment. In addition, although fiscal policy has provided important support for the economic recovery, it will need to be put on a more sustainable path in the medium term. Failure to do so risks a market reaction that could increase longer-term interest rates; economic growth would be hindered if government borrowing boosts the cost of capital and diverts resources away from private investment.

Reducing the deficit and avoiding a continuing buildup in government debt relative to income will be essential for bringing national production and spending into better balance. That balance, in turn, is necessary so that we are no longer so reliant on borrowing from other nations. Heavy dependence on foreign borrowing by the United States is not a solid foundation for long-term economic growth either here or in those countries extending us credit. The actions of U.S. authorities and private parties to bring about a better balance of saving and investment must be matched by action overseas in chronic surplus countries. While we reduce demand relative to our productive potential, the surplus countries must increase their domestic demand if the global economy is to thrive.

Finally, as has been so painfully demonstrated over the past few years, sustained growth requires a financial system that is much more resilient and thus better equipped to continue to supply funds to creditworthy borrowers when the unexpected happens. To this end, banks and other lenders must hold capital and liquidity to cover more of the risks they are taking, and they must have the capability to know what those risks are and to manage them effectively. Critically, the financial regulatory structure needs to be modernized to bring oversight and market discipline to bear much more effectively on our rapidly evolving financial system and to give regulators more tools to deal with problems as they arise. At the Federal Reserve, we are improving our supervision and regulation to incorporate a broader view of emerging risks in the financial system and to become more effective at translating identified risks to supervisory oversight and, if required, remedial actions by the banks.

Written by Colin Henderson

April 8, 2010 at 20:50

Posted in economy, US

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