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Bernanke: "extraordinary stress, worsening outlook"

Tuesday, October 07, 2008 | 03:00 PM

Bernanke at NABE:

"As you know, financial systems in the United States and in much of the rest of the world are under extraordinary stress, particularly the credit and money markets. The losses suffered by many banks and nonbank financial firms have both constrained their ability to lend and reduced the willingness of other market participants to deal with them. Great uncertainty about the values of financial assets, particularly more complex and opaque assets, has made investors extremely reluctant to bear credit risk, resulting in further declines in asset prices and a drying up of liquidity in a number of funding markets. Even secured funding has become expensive and difficult to obtain, as lenders worry about their ability to sell collateral in illiquid markets in the event of default. In addition, many securitization markets, such as the secondary market for private-label mortgage-backed securities, remain closed or impaired.

Considerable experience in both industrialized and emerging economies has shown that severe financial instability, together with the associated declines in asset prices and disruptions in credit markets, can take a heavy toll on the broader economy if left unchecked. For this reason, the Federal Reserve, the Treasury, and other agencies are committed to restoring market stability and are working assiduously to ensure that the financial system is able to perform its critical economic functions. Recent actions by the Congress have given the Treasury new tools and resources to address the stressed conditions of our financial markets and institutions. The Federal Reserve has also been granted a new authority, the ability to pay interest on bank reserves, which will allow us to expand our lending as needed to support the system while better managing the federal funds rate. These tools will provide important additional support for the government's efforts to strengthen financial markets and the economy.

Let me briefly review recent financial developments . . ." (cont)

Source:
Current Economic and Financial Conditions
Chairman Ben S. Bernanke
At the National Association for Business Economics 50th Annual Meeting, Washington, D.C.
October 7, 2008
http://www.federalreserve.gov/newsevents/speech/bernanke20081007a.htm