U.S. Economy Predicted To Recover in 2010Federal Reserve Chairman Ben Bernanke says that the U.S. economy will recover in 2010. The key to this happening is stabilizing the banking system. Bernanke made his predictions during a rare television interview. The groundwork that government officials are laying will avoid a depression, he says, but hurdles remain for a full recovery.
Bernanke says that a new American depression has been avoided. Defending government actions taken by the government since the recession began, including decision to allow Lehman Brothers to fail while at the same time bailing out AIG with a total of $170 billion in government loans, Bernanke explained the Fed didn't have the powers to save Lehman because the firm didn't have enough assets to post as collateral. AIG, the largest insurance company in the world, has insurance operations it could sell off to repay the loans. Bernanke says the AIG bailout averted a global economic meltdown.
Similar actions may be taken with other large financial institutions in trouble. There are 19 banks undergoing stress tests to see how they would withstand extreme financial shocks. He says the government will look to avoid massive bank failures, but won't prop up sick banks indefinitely. The government has demanded AIG divest itself and sell off subsidiaries and use the money to pay back the $170 billion it owes taxpayers.
Geithner to G-20: Aggressive Action Needed
Treasury Secretary Timothy Geithner told the G-20 finance ministers and central bank governors meeting in the UK over the weekend that aggressive actions are needed to fix the financial systems and get credit flowing again.
Geithner says the wide-reaching global crisis requires a coordinated global response. "We have a strong consensus on the need for both recovery and reform so that we never face a crisis like this again," he told the G-20 members.
Geithner says an effective response to restore global growth requires several things. It requires a sustained commitment to macroeconomic stimulus and pro-growth policies on a scale commensurate with the severity of the problem. "It requires aggressive actions to fix our financial systems and get credit flowing again. It requires substantial support from the international financial institutions targeted to those emerging markets and developing economies most affected by the crisis. This means a significant increase in resources - deployed more quickly - to provide financing in support of counter-cyclical fiscal policies, bank re pair and recapitalization to increase lending, trade finance, and support to the poorest countries that are most impacted by the crisis," Geithner says.
The Treasury Secretary says with these actions must come a clear commitment, when recovery is firmly established, "to return to fiscal sustainability and to unwind the extraordinary policy actions needed to restore economic growth and solve the financial crisis."
The G-20 agreed to mobilize more resources for the international financial institutions to address the risks posed by the pull back of capital flows and the fall in external demand. The G-20 supports the U.S. proposal for a substantial increase to emergency IMF (International Monetary Fund) resources through a major enlargement of the New Arrangements to Borrow (NAB) and expansion of its membership. Geithner has asked the World Bank and other Multilateral Development Banks to leverage existing resources by flexible use of their balance sheets to help meet financing needs.
The G-20 also agreed on a common framework of concrete changes to the international financial architecture. "Risk does not respect national borders. We must establish a much stronger form of oversight and clear rules of the game, more evenly enforced across the international financial system," Geithner told the G-20 members. This will require comprehensive changes both at the national and international levels. The United States will soon be releasing a comprehensive framework of regulatory reform. "Our strategy underscores our commitment to encourage a race to the top rather than a race to the bottom; a global move to higher standards," Geithner says.
AIG Bonuses Under Fire
The public outrage surrounding the payout of more than $165 million in bonuses to AIG executives -- while at the same time the company has taken more than $170 billion in bailout funds from the government -- has prompted AIG to say it will try to cut future bonuses and compensation for some of its top earning employees.
AIG CEO Edward Liddy sent a letter to Treasury Secretary Timothy Geithner saying AIG pledges to reduce 2009 bonus payments by at least 30 percent.
Liddy also laid out plans to limit compensation in AIG Financial Products, the London-based unit responsible for issuing the risky credit default swaps. This practice brought AIG to the brink of collapse last fall.
AIG's 25 highest-paid contract employees will reduce their salaries to $1 this year, and all other officers in the unit will reduce their salaries by 10 percent. Other "non-cash compensation" will be reduced or eliminated. Liddy does not receive a bonus, but in the letter says some of the bonus payments are unavoidable because of legal obligations.
The letter was prompted by a phone call from Geithner to Liddy last week where Geithner lashed out at Liddy and told him that millions of dollars in bonuses to senior employees were unacceptable and needed to be renegotiated. Geithner felt giving the awards were inappropriate in the current economic climate. AIG lost $62 billion in the last quarter of 2008.
AIG is the world's largest insurance company and has more than 74 million insurance policies issued in 130 countries.