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    While everyone is moving in the right direction…

    Fatih Özatay, PhD08 June 2009 - Okunma Sayısı: 1051


    FED President Bernanke's speech delivered in the House of Representatives budget committee was quite interesting. His speech was addressed in Turkey under the framework of the answer for the question 'Did we hit the trough?' However, the speech involved findings beyond that.

    In the first part, the speech mentions the clues indicating the worst part is left behind. But it is also emphasized that there are indicators showing the opposite. It also says that even if we hit the trough, it will take a long time to achieve the conditions before the crisis. In this context, it is said that the US economy will grow at a rate below the potential.

    Findings about the financial markets are more favorable. It is emphasized that in particular the markets supplying short-term funds started functioning again. It is pointed out that such developments can also be observed in credit markets extending longer-term loans. There is no doubt that the risk premiums in these markets are still too high; what is underlined is that the risk premiums have fallen down from even higher rates. I believe the most important point mentioned in his speech is: He mentions the rise in long term US Treasury bills as the sole negative development with respect to financial markets.

    In the third part of his speech, Bernanke analyzes the main factors constituting the foundations of this phenomenon. Ratio of budget deficit to national income in 2009 is expected to be around 13 percent. This extremely high rate reflects the cost of the operations to rescue financial markets and the measures to stimulate domestic demand.

    It is emphasized that as a result of the efforts to finance the budget deficit, ratio of federal debt stock to national income in 2009 will rise to 70 percent. The ratio before the crisis period stood at 40 percent: A significant rise over a short period of time. Bernanke's speech clearly indicates that FED considers the significant deterioration in the budget and the resultant jump in public debt are the real reasons behind the increase in the interest rates of long-term borrowing instruments of the US Treasury.

    See how the following statement resembles what we have gone through after the 2001 crisis: Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will neither have financial stability nor healthy economic growth. Again in the same part it is said: Even though we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets require that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical...

    You would easily think this statement was made by the Central Bank of the Republic of Turkey right after the 2001 crisis. The interesting part is: We have already encountered the highly important danger Bernanke touched upon. We had very hard time in leaving the 'Lack of fiscal discipline - unsustainably high levels of public debt - rise in risk premium - high real interest rate circle. However, we still act as if we haven't learned our lesson. This is for two reasons:

    First, we have missed the period where we would be completely right if we have temporarily loosened the budget. We started to announce worthwhile measures only nine months after the emergence of the crisis; when the rest of the world started to emphasize fiscal discipline! We are the best when it comes to put ourselves into trouble.

    I wish the only challenge was the unconformity of timing, there is a second challenge: There is a single way to prove that the budget loosening is temporary. It is necessary to found the legal framework that will ensure that the fiscal policy is sustainable in the long run. And we are scared to death from that framework (medium term fiscal rule).

    Or that we miss these obvious facts has anything to do with the 'monotype' higher education policy (of course if we have such a policy) of Turkey?


    This commentary was published in Radikal daily on 08.06.2009