Federal Reserve press conference, 2011-11-02 — Chair Ben Bernanke

Question (John Berry, Fiscal Times): John Berry, Fiscal Times. In the European debt deal that may or may not come to pass, it’s been said that the banks operating there—the big banks—have all agreed that a 9 percent Tier 1 capital ratio is appropriate. A lot of U.S. banks have been arguing that they can’t afford to do that. It will reduce lending, but it would also put them at a competitive disadvantage internationally. With that happening in Europe, do you think it’s appropriate that the big banks in the U.S. should accept such a Tier 1 capital requirement, and how does that development stand at this point?
Answer: Well, we are committed to, and are in the process of, implementing Basel III, which has a basic requirement including a buffer of 7 percent, and then additional surcharges for the largest institutions. We think that’s an appropriate framework. I’m not sure that the 9 percent that Europeans are talking about is really comparable to this, to the capital requirements that we are imposing, or will be imposing, on U.S. banks. For example, the composition of their capital is not, as far as I understand, purely common equity. I do not know what risk weights are being applied to the assets. So there are a number of questions of comparability. My expectation and hope is that—over the medium term, that the Europeans who agreed to the Basel III conditions will ensure that their banks meet the Basel III standards over time. Of course, that’s being phased in over a number of years so as not to jeopardize in any way the recovery. But, over the remainder of this decade, we anticipate implementing all of the key elements of Basel III in the United States.

Question (James Puzzanghera, Los Angeles Times): Hi, Jim Puzzanghera from the LA Times. You mentioned before the streak of bad luck that struck the economy earlier this year. With the latest developments in Europe this week, where the debt deal seemingly was done and now the rug was pulled out, are you getting the sense that this economy just can’t catch a break? And how would you advise average Americans to deal with these continued shocks to the economy and to the financial markets?
Answer: Well, I don’t want to make excuses. Again, we did overestimate the pace of recovery for some fundamental reasons having to do with, as I mentioned, the time taken to achieve financial repair, the state of the housing market, and so on. But that being said, as I indicated earlier, there has been a certain amount of bad luck, and I think the volatility in financial markets associated with the European situation has been—along with volatility associated with the U.S. fiscal conditions, has been a drag on recovery. I think it’s part of the reason why the second half of 2011 was less strong than we anticipated when I was here at the last press conference in June. So there has been that concern. It’s showing up in Americans’ confidence and sentiment. You can see that right now consumer confidence is about where it was in the depths of recession; that’s very discouraging. To some extent, at least, it will be a drag on consumer’s willingness to spend and to invest. My best advice to Americans is to continue to live your lives, though, and to continue to think about your personal situation and try to make smart decisions based on your own financial position. Clearly, Americans are trying to improve their balance sheets; they’re trying to pay down debt. That’s, of course, important. At the same time, you want to make smart decisions, you want to make good investments, you want to budget properly. So financial literacy is a big part of this, and lack of financial literacy was one of the things that got us into this mess in the first place. So I would advise people to try to be smart about their finances. Unfortunately, we can’t disassociate ourselves from Europe; the things that are happening there do affect us, and that’s an unfortunate fact. I hope very much that the Europeans will find a set of solutions that will allow markets to calm down and take off some of the headwinds from the U.S. economy.

Question (Darren Gersh, Nightly Business Report): Darren Gersh, Nightly Business Report. Given how hard it has been to bring down unemployment in the past, why are you confident you have the tools to bring it down in the future?
Answer: Well, we have the ability to provide more stimulus and accommodation. We believe that a good bit of the unemployment that we are seeing is what economists would call cyclical unemployment—that is, unemployment arising because of inadequate demand in the economy. If that’s the case, then a monetary policy—by lowering interest rates, making financial conditions more accommodative—should stimulate demand, should stimulate spending, and over a period of time, that will help bring down cyclical unemployment. That is something that we know from a lot of experience, and, although it’s been a very slow process here, there’s no reason to think that the same basic effect will not work in this case as well. Now, it’s also possible that part of the increase in unemployment reflects so-called structural factors—mismatches between worker skills and job opportunities, loss of skills, geographical mismatch, et cetera. And to the extent that that’s the case, then monetary policy is much less effective because in that case, only other kinds of labor market policies really can make progress against that type of unemployment. But again, I do think that a considerable part of the unemployment that we are seeing is cyclical and is thus amenable to monetary policy. Final comment: Cyclical unemployment, left untreated, so to speak, for a long time can become structural unemployment as people lose skills, as they lose attachment to the labor force, as their work networks dry up and so on. So in that respect, it’s important for us to try to address the unemployment problem in a sense while it’s still amenable to monetary policy.