Federal Reserve Chairman Ben Bernanke will be speaking at the Senate Banking, Housing and Urban Affairs Committee on Tuesday, his first public speech on the economy in nearly a month.

Rudy Narvas, a Fed watcher and macroeconomist at 4Cast, said he expects Bernanke to make comments similar to those heard from Treasury Secretary Henry Paulson in recent days, namely that the actions to save AIG were far from ideal, but they were necessary.

"We did this to protect the taxpayer," Paulson said on NBC's Meet the Press on Sunday. "This is not something that we wanted to do. This was something that was very necessary."

Narvas noted that Bernanke's two academic specialties prior to joining the Fed were the Great Depression and Japan's "Lost Decade," so his comments should be direct and informative about the crisis facing the U.S. He expects Bernanke to elaborate on why the central bank let Lehman Brothers fall, but chose to save AIG. The consensus opinion is that letting AIG fall would carry systemic risks, whereas Lehman's bankruptcy would not, but Bernanke has yet to say that himself.



On Wednesday, when the Chairman testifies at the Joint Economic Committee, Narvas said Bernanke will likely focus more on the economic implications of the past week. He thinks Bernanke will forecast that the economy should be back on track in 2009, and also that Bernanke will not hint that a rate cut is in the works.

Narvas also commented that the recent reversal in oil prices - which moved up as much as $25 per barrel in a single day on Monday - substantiate the FOMC's continued worry about inflation. Critics of the Fed, who were disappointed when the Fed held rates last week, had criticized the Bank for maintaining a cautious outlook on inflation.

Narvas said the Fed's view is that commodity prices will rise due to global demand, and noted that market indicators have been sending the same message recently.

In his last substantial speech on the economy on Aug. 22, Bernanke said the experience of the Bear Stearns liquidity crisis had led him to believe that financial infrastructure needed to be improved with "macroprudential" oversight, which would reduce systemic risk in the event of a crisis.

He said a system-wide focus for financial regulation or oversight could reduce moral hazard, broaden the mandate of regulators and even develop a more fully integrated overview of the entire financial system.

"A possible approach would be to give an agency-the Treasury seems an appropriate choice-the responsibility and the resources, under carefully specified conditions and in consultation with the appropriate supervisors, to intervene in cases in which an impending default by a major nonbank financial institution is judged to carry significant systemic risks," he said at the Fed's annual retreat in Jackson Hole, Wyoming.

By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2008