ben s bernanke : economic outlook and financial markets testimony of mr ben s bernanke, chairman of the board of governors of the us federal reserve system, before the committee on the budget, us house of representatives, washington dc, 20 october 2008. * * * chairman spratt, representative ryan, and other members of the committee, i appreciate this opportunity to discuss recent developments in financial markets, the near - term economic outlook, and issues surrounding the possibility of a second package of fiscal measures. financial developments as you know, financial markets in the united states and some other industrialized countries have been under severe stress for more than a year. the proximate cause of the financial turmoil was the steep increase and subsequent decline of house prices nationwide, which, together with poor lending practices, have led to large losses on mortgages and mortgagerelated instruments by a wide range of institutions. more fundamentally, the turmoil is the aftermath of a credit boom characterized by underpricing of risk, excessive leverage, and an increasing reliance on complex and opaque financial instruments that have proved to be fragile under stress. a consequence of the unwinding of this boom and the resulting financial strains has been a broad - based tightening in credit conditions that has restrained economic growth. the financial turmoil intensified in recent weeks, as investors'confidence in banks and other financial institutions eroded and risk aversion heightened. conditions in the interbank lending market have worsened, with term funding essentially unavailable. withdrawals from prime money market mutual funds, which are important suppliers of credit to the commercial paper market, severely disrupted that market ; and short - term credit, when available, has become much more costly for virtually all firms. households and state and local governments have also experienced a notable reduction in credit availability. financial conditions deteriorated in other countries as well, putting severe pressure on both industrial and emerging - market economies. as confidence in the financial markets has declined and concerns about the u. s. and global economies have increased, equity prices have been volatile, falling sharply on net. in collaboration with governments and central banks in other countries, the treasury and the federal reserve have taken a range of actions to ameliorate these financial problems. to address ongoing pressures in interbank funding markets, the federal reserve significantly increased the quantity of term funds it auctions to banks and accommodated heightened demands for funding from banks and primary dealers. we have also greatly expanded our currency swap lines with foreign central banks. these swap lines allow the cooperating

fully enforce their compliance. bank of latvia ’ s policies and the introduction of the euro our policy responses to the euro are based on the general objectives set by our country. accession to the eu is a strategic aim for latvia, and we see entry in the european monetary union as a part of this task. we have adopted the fulfilment of maastricht convergence criteria as a medium - term target, and will be able to meet all of them in 4 to 5 years. latvia already complies or is close to complying with most of them : • the public debt is much lower than maastricht requirements, i. e. 13 % of gdp ; • there has been no budget deficit in 1997 and 1998 ; the fiscal situation in 1999 was strongly influenced by external factors, and the government intends to reduce the deficit in 2000 below maastricht requirements ; • the lats has been pegged to the sdr at a constant exchange rate since 1994, and, in principle, we are meeting the currency stability criteria ; • inflation has declined to a stable level below 3 %, close to the maastricht targets ; • government bond yield rates, while still high, are on the downward trend, and we expect to be able to meet the requirements in the medium - term. the bank of latvia will be prepared to join the european system of central banks at the time of latvia ’ s accession to the eu. the structure and objectives of the bank of latvia, the degree of its independence and the set of monetary policy instruments are fully in line with those defined for the european system of central banks. during the pre - accession period, the exchange rate peg of the lats to the sdr will be maintained. this peg has served us well and has ensured less exchange rate fluctuation than a peg to any single currency. in addition, the composition of latvia ’ s foreign trade by settlement currencies closely resembles the composition of the sdr basket, with usd being the major component in both. however, we are closely monitoring the new european currency. we hope that the euro will become a stable currency and anticipate its wider use in world trade. if this happens, we will have all the necessary economic grounds for joining the european monetary union after latvia ’ s accession to the eu.