Markets

WASHINGTON (Feb. 24) - Federal Reserve Chairman Ben Bernanke told Congress Tuesday the economy is suffering through a "severe contraction" and pledged to use all available tools to lift the U.S. out of the recession that already has cost millions of Americans their jobs.

Skip over this content

In testimony to the Senate Banking Committee, Bernanke said the economy is likely to keep shrinking in the first six months of this year. Housing, credit and financial crises - the worst since the 1930s - plunged the economy into its worst slide in a quarter-century at the end of last year.

Bernanke hoped that the current recession will end this year, but said there were significant risks to that forecast. Any economic turnaround will hinge on the success of the Fed and the Obama administration in getting credit and financial markets to operate more normally again.

"Only if that is the case, in my view there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," Bernanke said.

Among the risks to any recovery are if economic and financial troubles in other countries turn out to be worse than anticipated, which would hurt U.S. exports and further aggravate already shaky financial conditions in the United States.

Another concern is that the Fed and other Washington policymakers won't be able to break a vicious cycle where disappearing jobs, tanking home values and shrinking nest eggs are forcing consumers to cut back sharply, worsening the economy's tailspin. In turn, battered companies lay off more people and cut back in other ways.

Skip over this content

"To break that adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets," Bernanke said.

In an effort to revive the economy, the Fed has slashed a key interest rate to an all-time low and Obama recently signed a $787 billion stimulus package of increased government spending and tax cuts.

In addition, Treasury Secretary Timothy Geithner has revamped a controversial $700 billion bank bailout program to include steps to partner with the private sector to buy rotten assets held by banks as well as expand government ownership stakes in them - all with the hopes of freeing up lending. The Obama administration also will spend $75 billion to stem home foreclosures.

Skip over this content

Those and other bold steps - including a soon-to-be-operational Fed program to boost the availability of consumer loans - for autos, education, credit cards and other things - should over time provide relief and promote an economic recovery, Bernanke said.

Radical actions by the government since last fall when the financial crisis intensified have relieved some credit and financial strains, Bernanke said.

"Nevertheless, despite these favorable developments, significant stresses persist in many markets," he said. "Notably most securitization markets remain shut ... and some financial institutions remain under pressure."

Although Bernanke didn't mention any financial institutions by name, Citigroup Inc. - the industry's troubled titan - apparently is in line for additional government help.

Critics worry the Fed's actions have the potential to put ever-more taxpayers' dollars at risk and encourage "moral hazard," where companies feel more comfortable making high-stakes gambles because the government will rescue them.

Sen. Jim Bunning, a Kentucky Republican, criticized the Fed for not releasing the names of banks that borrow from it. But Bernanke said that could create a "stigma" on the banks, possibly putting them in further jeopardy and defeat the purpose of the Fed's help.

Stress tests on the biggest U.S. banks, which regulators will start conducting Wednesday, are designed to give regulators a better idea of how much additional capital and the type needed for banks to lend if the crisis were to grow worse than anticipated, Bernanke said.

All the negative forces have battered consumers and businesses. "The economy is undergoing a severe contraction," Bernanke said.

The U.S. unemployment rate is now at 7.6 percent, the highest in more than 16 years, and it will climb higher - even in the best-case scenario that an economic recovery happens next year.

The Fed expects the jobless rate to rise to close to 9 percent this year, and probably remain above normal levels of around 5 percent into 2011.

The recession, which started in December 2007, already has killed a net total of 3.6 million jobs.

Fed policymakers think that a "full recovery" of the economy is likely to take more than two or three years, Bernanke said.

To brace the economy, many analysts predict the Fed will leave its key rate at record lows through the rest of this year. The Fed has said repeatedly that it will explore expanding existing programs to provide loans or buy debt, or come up with new tools to fight the crises.

The Fed is "committed to using all available tools to stimulate economic activity and to improve financial market functioning," Bernanke told lawmakers Tuesday.

Sen. Christopher Dodd, chairman of the panel, said the economy's problems "spread like cancer" and told Bernanke that he has an "extraordinarily difficult task ahead of you" in turning the situation around.

Copyright 2009 The Associated Press. The information contained in the AP news report may not be published, broadcast, rewritten or otherwise distributed without the prior written authority of The Associated Press. Active hyperlinks have been inserted by AOL.

2009-02-24 10:15:35

PRINT|E-MAIL TWITTER FACEBOOK DIGG AIM MORE

Must Read?

0 %

0 VOTES

Recent Comments

Post Your Own

1 - 10 of 869

869 comments

CKRelax 02:17:56 PM Feb 26 2009

Report This!

The economy is always at a low right before and after an election. IT is within six months time of the new person in the white house, that we see a normal economic flow or a disaster still coming. Too soon to be afraid right now. I was pleased that we are not bailing out auto companies, and, that education is a forfront of tomorrow, with Pres O.

SSJKT 08:24:37 PM Feb 25 2009

Report This!

Bernanke farts and the world will change. Bernanke burbs and the eceomincs will turn around. I wonder who is running the show behing closed doors. You see that all the congressmen's wives are shopping on our tax money in Europe and staying on or tax money in expensive hotels. I wonder where we will end up, paying for all those bimbos. CHange the white house it's time. Out with the greedy bastards and in with new fresh wind. I cannot believe that we have no say in anything when it comes to our ta dollars. Shame on you all. May you all rott in hell. People kill themselves because they cannot pay their mortgages and family are being ruined and you go out shopping? Who in the hell do you people think you are? ANswer to all of us it would be interestng to know what your thoughts are on that subject.

SYNCRO100 04:15:23 PM Feb 25 2009

Report This!

Should end in '09 AFTER they take the what's left of your money. Obama and Co. have spent more $ in one month than Bush and Co. did in eight years. Put that in your pipe and smoke it.

CruzAnglero 04:04:55 PM Feb 25 2009

Report This!

i might be a moron, but, why are we bailing out banks that spend our money, like aig, on parties for their staff? this stimulus package could have included money to pay the people of new orleans to give up their house and leave, and re-plan this city so katrina doesn't happen again. because these people are not going to leave like that, they put money into their houses and lots that they lost, u know.

Pepperoni0 04:00:37 PM Feb 25 2009

Report This!

Bernanke says recession may end in 2009....may end? To me that sounds like it may - or may not - end. In other words, he doesn't know, he's just guessing, or perhaps hoping like lots of other people. The economy will never recover until the banking and mortgage mess is behind us since that is what started us on the downhill path.

JIBHANK 04:00:11 PM Feb 25 2009

Report This!

Everytime I read another story about civil disobediaence caused by ACORN it makes me sick! The rule of law is what separates this country from others. Arrest them and the homeowners that refuse to leave. They have to learn to move-on. In New Orleans, for example, ACORN defended the rights of people who insisted on re-builing their homes right where they were. How stupid is that. The city is sown to half the pre-Katrina population. Why don't they exercise some intelligent urban planning and re-buile the city in a way that makes sense.

CruzAnglero 04:00:06 PM Feb 25 2009

Report This!

i knew a lady who twined her tomato plants around the fence in her yard, from seed. it didn't take that much time, and it yields so many tomatoes, it offsets any initial cost. she gave away bags of these. i live in an apt. complex and cant do it, since these plants require full sun. unless i could devote an entire room to9 tomato production using lamps, like the weed growers.

CruzAnglero 03:51:59 PM Feb 25 2009

Report This!

time to plant ur tomatoes, corn , peppers n lettuce and eat them, people. that's the only way u know ur buying "american".i know my kids are american because they popped out of me, but if they were adopted, they would surely be chinese or have chinese parts...

JIBHANK 03:50:05 PM Feb 25 2009

Report This!

Those of us that bouoght within our means and work hard to stay current on our mortgage will take it in the shorts again, while those who lied on their application to buy too much house with risky financing will get bailed out at our expense. Meanwhile they will cry the blues and point their grubby little fingers at the "predatory" lenders. Give me a break! When are we going to stop treating stupid people like children?

AJGORM 03:49:23 PM Feb 25 2009

Report This!

Interest rates may of come down 1 %. fixed..if you have a home in forcloseur and it is adjustable or an interest only loan you are going to pay more than you can afford if you cant pay the loan you have now..

1 - 10 of 869

869 comments