Bernanke hints at recession
WASHINGTON (AP) - April 2, 2008 Bernanke's testimony to the Joint Economic Committee was a much
more pessimistic assessment of the economy's immediate prospects
amid a trio of crises - housing, credit and financial.
"It now appears likely that gross domestic product (GDP) will
not grow much, if at all, over the first half of 2008 and could
even contract slightly," Bernanke told lawmakers. GDP measures the
value of all goods and services produced within the United States
and is the best barometer of the United States' economic health.
Under one rule, six straight months of declining GDP, would
constitute a recession.
Still, Bernanke said that he expects more economic growth in the
second half of this year and into 2009, helped by the government's
$168 billion stimulus package of tax rebates for people and tax
breaks for businesses as well as the Fed's aggressive reductions to
a key interest rate. Nevertheless, the chairman acknowledged
uncertainty about the Fed's next steps, notwithstanding the
mounting economic woes.
"Much necessary economic and financial adjustment has already
taken place, and monetary and fiscal policies are in train that
should support a return to growth in the second half of this year
and next year," Bernanke said.
To try to limit the damage, the Federal Reserve has aggressively
cut a key interest rate, now at 2.25 percent, to spur buying and
investing by individuals and businesses. At the Fed's last meeting
in March, however, two members dissented from the Fed's decision to
sharply cut rates, showing a rare division in the often unified
front the Fed shows the public. The dissenting officials, who had
reputations for being extra concerned about inflation, favored a
smaller reduction. Although Bernanke said he hopes inflation will
moderate in coming quarters, he acknowledged that high energy
prices have clouded the inflation outlook.
Many economists had predicted the Fed might drop it key that
rate again when it next meets April 29-30, although Bernanke's
remarks cast some doubt on that scenario.
On Wall Street, stocks initially dropped after the Fed chief's
remarks but later turned slightly positive.
Housing, credit and financial woes are threatening to push the
country into a deep recession. The situation has emerged as a top
concern for presidential contenders and a hot-button issue for
Congress. It has thrust the White House and the Fed in
crisis-management mode.
Faced with mounting home foreclosures and job losses, Bernanke
has been under immense political and public pressure to provide
relief and help turn around a faltering economy.
Committee Chairman Sen. Charles Schumer, D-N.Y., peppered
Bernanke with questions about the Fed's moves to aid once mighty
Wall Street firm Bears Stearns and then juxtaposed that with - what
he believed was a lack of help - to millions of people at risk of
losing their homes.
"I hope that you will use your position to jawbone this
administration to get behind the housing relief effort before
Congress." Schumer said. "Addressing the housing crisis head-on
will do as much to instill confidence in the markets as lowering
interest rates or bolstering regulatory oversight of wayward
mortgage lenders and financial institutions. We need to do all of
it."
"Wall Street has been helped. Now it's time to help Main
Street," added Rep. Carolyn Maloney, D-N.Y.
Many private analysts believe the economy contracted in the
first three months of this year, signaling the start of a
recession. The government releases first-quarter results later this
month. The economy lost jobs in January and February, with many
economists bracing for more losses when the report for March is
released on Friday. Bernanke said he expected unemployment to move
"somewhat higher in coming months."
"Clearly, the U.S. economy is going through a very difficult
period," he told lawmakers, adding that all the problems have
weighed heavily on consumers whose spending is indispensable to
economic vitality.
The Fed also has taken a series of extraordinary steps in recent
weeks and months to prop up the nation's financial system, which
has been in state of high jeopardy.
In a controversial move, the Fed backed a $29 billion lifeline
as part of JP Morgan's deal to take over the troubled Bear Stearns,
the nation's fifth largest investment house, which was on the brink
of bankruptcy. Bear Stearns had invested heavily in risky
mortgage-backed securities that eventually soured with the collapse
of the housing market.
Bernanke defended the move. "With financial conditions fragile,
the sudden failure of Bear Stearns likely would have led to a
chaotic unwinding of positions in those markets and could have
severely shaken confidence," he said. "The damage caused by a
default by Bear Stearns could have been severe and extremely
difficult to contain."
Although the taxpayers are on the hook for the $29 billion,
Bernanke said he was "reasonably confident we'll be able to
recover the full amount." He also said that Bear Stearns'
investments that the Fed took control of "are entirely investment
grade."
In addition, the Fed - in the broadest use of its credit
authority since the 1930s - agreed to temporarily let big
investment firms obtain emergency financing from the Fed, a
privilege that previously had been granted only to commercial
banks.
Those actions have prompted criticism from Democrats and others
who contend that the Fed is bailing out Wall Street and putting
billions of taxpayers' dollars at potential risk. Bernanke and the
Bush administration argued that the actions were warranted to avert
a potential meltdown in the entire financial system, something that
would have devastating consequences for the overall economy.
Asked about the Bush administration's plan to revamp the
country's creaking financial system, Bernanke said it was vital for
the Fed to have sufficient enforcement powers. Under the plan, the
Fed would become a top cop in charge of financial market stability
but would lose its day-to-day supervision of U.S. banks.
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On the Net:
Joint Economic Committee: http://www.jec.senate.gov