- The Washington Times - Thursday, February 16, 2006

Federal Reserve Chairman Ben Bernanke, in his first official testimony before Congress, said the economic expansion remains on track, but could be threatened by a collapse in the housing market or further spikes in energy prices.

In more than three hours of testimony before the House Financial Services Committee, the newly installed Fed chief stuck to his pledge not to plunge into political debates, but said Congress must face the fact that it is spending beyond its means and will have to bring spending and revenue in line.

His overall upbeat assessment of the economy and glitch-free presentation cheered financial markets, although it hinted at further interest rate increases.

With reports showing housing and mortgage activity down by more than 20 percent from a year ago and prices stagnating, “there are some straws in the wind that housing markets are cooling a bit,” he said. “Uncertainty attends the outlook.”

“A leveling out or a modest softening of housing activity seems more likely than a sharp contraction,” as historically low interest rates continue to support the market, he said. But “prices and construction could decelerate more rapidly than currently seems likely.”

Should a steep decline occur, Mr. Bernanke said, exotic mortgages with easy repayment terms issued in recent years to less credit-worthy home buyers could pose problems.

That is why federal banking regulators recently issued guidance requiring banks to ensure that their customers can repay the loans when they are fully adjusted to reflect market interest rates and the repayment of principal, he said.

“These loans are quite popular in terms of new extensions. They remain a fairly modest portion of the outstanding mortgages,” he said. “The one area where they may pose some risks if the housing market slows down might be in the subprime area where they have been popular, and it’s more likely in those cases that they’re inappropriate for the buyer.”

High energy prices pose a threat both to economic growth, because they sap consumer spending, and inflation, by adding to business and consumer costs, he said.

So far, a doubling of oil prices since 2003 has not caused a widespread inflation problem as price spikes did during the 1970s, when the increased costs were passed on to consumers through price increases and cost-of-living adjustments that led to double-digit inflation.

The willingness of consumers and businesses today to absorb the higher energy costs without raising their inflation expectations has saved the economy from much turmoil, Mr. Bernanke said, because it has prevented the Fed from having to sharply raise interest rates to stop an inflationary spiral.

Still, he was not optimistic about the outlook for energy, saying further spikes in oil and gas prices could pose challenges to the economy, because global supplies and demand for oil are closely in balance and are likely to remain so.

“Over the next five or 10 years, we are in the zone of vulnerability without available alternatives to the extent we would like, and with a relatively small margin of error in terms of global supplies,” he said.

Mr. Bernanke noted that the sharp slowdown in the economy in the fall, with growth falling to a 1.1 percent rate, largely reflected the fallout from Hurricanes Katrina and Rita in August and September that caused a steep run-up in oil and gas prices.

While Mr. Bernanke’s testimony on economic matters mostly echoed the views of his predecessor, Alan Greenspan, he took a markedly different tack on budget questions from committee members.

He declined to endorse specific proposals, such as reinstatement of the pay-as-you-go budget rules that Mr. Greenspan openly advocated, saying that would be an inappropriate intrusion into internal congressional matters and procedures.

Occasionally, he could not refrain from inserting his opinion, however. At various times, he appeared to endorse cuts in capital gains and dividend taxes as well as calls for the president and Congress to include all the costs for the wars in Iraq and Afghanistan in their budgets, rather than add them later in supplemental spending legislation as they have been doing.

Although he declined to take a position on the Alternative Minimum Tax, Mr. Bernanke pointedly noted that reforming it “is going to increase the deficit because it’s going to lower tax revenues.”

“Those members of the Congress who are in favor of low tax rates and continuing tax cuts have to accept that in order for those low tax rates to be sustained, ultimately they have to find savings on the spending side to avoid exploding deficits.

“And likewise, those who would like to see a more expansive role of the government need to understand and accept that commensurate tax revenues are going to be necessary to support those activities.”


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