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Akaka, Bernanke discuss economic recovery

MEDIA RELEASE

U.S. Sen. Daniel K. Akaka , a senior member of the banking committee, this week discussed the progress of the economic recovery and ways to encourage responsible consumer behavior through financial literacy with Federal Reserve Chairman Ben Bernanke.

“In the current economic climate, consumers are confronted with difficult financial decisions. And this is the case in Hawaii, where many homeowners face possible foreclosure and the average credit card debt of a resident is the second highest in the country,” Akaka said to Bernanke. “How can we continue our efforts to promote economic recovery and at the same time encourage responsible consumer behavior and financial decision-making?

“That’s a very good question,” Bernanke said. “So part of the problem now is that the demand, the total demand in the economy is not adequate to fully utilize the resources of the economy. And that’s why we talk about the need for greater consumer spending and greater investments and so on. Of course, we want consumers to be responsible as well. And they have, in fact, raised their savings rates and have reduced their leverage, and all that is positive.

“…Of course, this all relates, as you’ve often mentioned, to financial literacy and the ability to make good decisions. We, obviously, want people to make decisions that are appropriate for their own needs, for their stage in the life cycle, for their family responsibilities, for their retirement, all those things. And that remains an important goal even as — you know, as we worry about trying to get the economy back to full employment.”

A full transcript of Senator Akaka’s questioning at the Committee on Banking, Housing, and Urban Affairs appears below:

AKAKA:

Chairman Bernanke, this is a question which is a follow-up on your discussion with Chairman Johnson and Senator Crapo.

In your testimony you note there has been some modestly encouraging data recently, including slightly better performance in the labor market, improved consumer sentiment, and some increases in manufacturing.

But these signs of economic recovery are not necessarily reflected yet in the experience of our workers and their families in the communities.

Putting aside a crash in the euro zone, what possible setbacks concern you the most with respect to risks in our economic recovery?

For instance, could action to cut critical investments too quickly send the economy back into a slowdown?

BERNANKE:

Well, let me just say first that one of the points that I talked about in my remarks is there still is a little bit of a contradiction between the improvement in the labor market and the speed of the overall recovery in terms of growth, in particular.

I mentioned that income had been flat for consumers in 2011. The revised data from yesterday actually says it was a little bit better than flat, but still less than 1 percent. So you’ve still got consumers — consumption spending growing relatively weakly; you’ve got the fiscal issues there hanging — hanging over our heads. So in order to make this a really sustainable, strong recovery, we need to have both declines in unemployment and strong growth in demand in production. And I think that’s something we have to watch very carefully.

In terms of the risk to that, I do have to mention Europe because I think that’s important. Another is the oil prices. We’ve seen a number movements up and down in energy prices. To some extent a little bit of the movement in the commodity prices is essentially inevitable because the economy is growing and the world economy is growing, The demand for commodities goes up and that’s gonna create some tendency toward higher commodity prices.

But when you have shocks to commodity prices arising from geopolitical events and the like, those are unambiguously negative and are bad for both households and for the broader economy.

Housing, I think, remains a very difficult area. We’re hoping for price stabilization. We think once people have gotten a sense that the housing markets have stabilized, it’ll be much more willing to buy and then firms — and then banks will be more willing to lend. But right now there’s still uncertainty about, you know, where the housing market is going, which I think is troubling.

And I guess, finally, I would mention fiscal policy, which both in the short term in terms of the uncertainty about where fiscal policy’s gonna go over the next year and in the long term in terms of whether or not Congress and the administration will work together to have a sustainable fiscal path, I think both of those things are creating some uncertainty and concern that will — do pose some risk to the economy.

So there are a number of different things, but overall, of course, there has been some good news. And, of course that’s welcome.

AKAKA:

Thank you for that response.

Chairman Bernanke, as you know, I’m most concerned with the well- being of consumers. In the current economic climate, consumers are confronted with difficult financial decisions. And this is the case in Hawaii where many homeowners face possible foreclosure and the average credit card debt of a resident is the second highest in the country.

We know that by saving individuals can help protect themselves during economic downturns. We also know that our slow economic recovery is partially due to low consumption or consumer spending.

My question to you relates to the intersection of these two actors. How can we continue our efforts to promote economic recovery and at the same time encourage responsible consumer behavior and financial decision-making?

BERNANKE:

Well, that’s — that’s a very good question.

So part of the problem now is that the demand, the total demand in the economy is not adequate to fully utilize the resources of the economy. And that’s why we talk about the need for greater consumer spending and greater investments and so on.

Of course, we want consumers to be responsible as well. And they have, in fact, raised their savings rates and have reduced their leverage, and all that is positive.

I think there’re two answers to your question. One is that demand comes from places other than consumer spending. It can come from capital investment, for example; it can come from net exports. Those are some areas where unambiguously higher investment creates more capital and more potential growth in the future. Greater exports reduces our trade deficit, increases our foreign earnings, makes us more competitive internationally. So those are alternatives to consumer spending to provide growth.

But then there’s also the bit of a paradox that consumer spending collectively, if it generates more activity, more hiring, more wage income, actually can in the end lead to sounder consumer finances than the alternative. Because if the economy’s growing strongly, jobs are being created, income’s being created, then consumers will actually be better off.

So confidence is really important. If people are confident about their job prospects and about their income prospects, it can be a self-fulfilling prophecy as they go out and they become more confident in their — in their purchasing habits.

Of course, this all relates, as you’ve often mentioned, to financial literacy and the ability to make good decisions. We, obviously, want people to make decisions that are appropriate for their own needs, for their stage in the life cycle, for their family responsibilities, for their retirement, all those things. And that remains an important goal even as — you know, as we worry about trying to get the economy back to full employment.

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