In this Foreclosed Climate the Focus Should be on Budget Deficits

June 10th, 2009

Federal Reserve Chairman Ben Bernanke said that in this foreclosed homes climate of the economy the focus should be on budget deficits. He is urging both the Congress and President Obama’s administration to start working out a strategy to put a check on the spirally high budget deficits. If this is not done in the long run it will gnaw into the confidence of investors and put at risk the long-term health of the economy. He made these comments while speaking before the House Budget Committee on Wednesday 4th June 2009. It came in the wake of increasing worry at home and abroad about the mounting red in the budget of the country.

Bernanke said, “Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

According to White House estimates the government will be burdened with a record breaking deficit of $1.8 trillion this year. It will be four times higher than last year that had reached an all time high.

Thanks to the recession the taxes coming in from individuals and companies have fallen considerably. On the other hand the spending of the government has increased because of the foreclosure crisis. Billions are being given to banks to support the banks, assist the unemployed and those affected by the historic downturn – the worst since the time of World War II.

Bernanke justified the measures being taken by the government. He felt that the intervention was absolutely “necessary and appropriate” although it has caused this jumbo sized budget deficit.

Bernanke appreciated the fact that the Congress as well as the administration were facing “formidable near-term challenges”. It was imperative that these should be addressed to bring back stability to the financial system, contain foreclosures and egg on the banks to freely start lending. It is the success of these various measures that holds the key to restoring the economic health of the country.

But on the other hand prolonged period of budget deficit would make the investors lose their confidence in US debt and this will push up interest rates. Higher rates would make the people become shy about spending and investing. Ultimately this will hurt the economy.

Striking a note of caution Bernanke said, “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.”