ben s bernanke : achieving fiscal sustainability speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the national commission on fiscal responsibility and reform, washington dc, 27 april 2010. * * * i am pleased to be here today at the first meeting of the national commission on fiscal responsibility and reform. the president has assigned chairman bowles, chairman simpson, and their colleagues the very substantial task of charting a path to fiscal sustainability for the united states. the deliberations of this commission are especially timely because some of the fundamental sources of long - term fiscal imbalances are no longer distant forecasts, but instead are unfolding in the here and now. the task of developing and implementing sustainable fiscal policies is daunting, but meeting this challenge is absolutely essential. history makes clear that failure to achieve fiscal sustainability will, over time, sap the nation ’ s economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability. long - term fiscal challenges our nation ’ s fiscal position has deteriorated appreciably since the onset of the recession and the financial crisis. the exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the costs of policy actions taken to ease the recession and steady financial markets. as the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and promote financial stability are phased out, the budget deficit should narrow over the next few years. however, even after economic and financial conditions have returned to normal, in the absence of further policy actions, the federal budget appears set to remain on an unsustainable path. a variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time. moreover, as debt and deficits grow, so will the associated interest payments, an obligation that in turn further increases projected deficits. unfortunately, we cannot grow our way out of this problem. no credible forecast suggests that future rates of growth of the u. s. economy will be sufficient to close these deficits without significant changes to our fiscal policies. among the primary forces putting upward pressure on the deficit are rapidly rising healthcare costs and the aging of the u. s. population. federal spending for medicare and medicaid has increased substantially as a share of

of counterparties and the large size of its refinancing operations – the eurosystem has been able to step in effectively when intermediation in inter - bank markets deteriorated, without the need to make changes to its framework. as a side effect of the broad range of assets accepted as collateral, the framework helped us also during the turmoil to address liquidity squeezes in some markets, including the abs market, as it mitigated refinancing risks for asset classes that had become illiquid. this has contributed to financial stability in the euro area. other central banks may have had those effects in mind when they initiated changes to their operational framework in the wake of the turmoil, leading to a significant degree of convergence among the various frameworks. of course, the ability of the eurosystem ’ s operational framework to respond to the challenges for monetary policy implementation posed by the recent period of financial market volatility does not mean that there is no scope for further improvements and refinements to make it even more effective. regarding this point, the ecb yesterday announced some technical refinements to its risk control framework for eurosystem credit operations. these are the result of a regular review of the framework, conducted on a biennial basis with the objective of identifying possible improvements and ensuring that the eurosystem remains adequately protected against financial risks in the face of changes in financial markets and collateral use practices. the announced refinements are as follows : first, some revisions are being introduced to the haircuts for credit institution debt instruments and asset - backed securities. the first are increased by 5 %, across all maturities, while the haircut schedule for abs is replaced by a unique haircut of 12 % for all maturities and coupon types. in addition, a valuation markdown of 5 % is imposed on those abs that are priced theoretically. second, the ecb has extended the definition of “ close links ” between counterparty and collateral. as you may know, the existence of such links, which are currently defined only in terms of cross ownership of capital, would prevent a counterparty from using that collateral. with the announced change, “ close links ”, are extended to situations in which a counterparty submits an abs as collateral when it provides support to that abs. such support should not be in the form of extensive liquidity support or in the form of a currency hedge. finally, we have placed more weight on the transparency of the credit assessments by