Bernanke: Financials Must Drive Recovery

Ability To Prop Up Struggling Financial Markets Will Dictate Economic Rebound, Fed Chief Says

(CBS/AP)  Federal Reserve Chairman Ben Bernanke told Congress Tuesday that any hope for an economic recovery will hinge on the government's ability to prop up shaky financial markets.

The effectiveness of a string of radical actions taken by the Fed, the Treasury Department and other agencies to stabilize markets "will be critical determinants of the timing and strength of the recovery," Bernanke said in testimony to the Senate Budget Committee.

The Fed chief found himself on the hot seat when lawmakers voiced concerns the government's new $30 billion lifeline for ailing insurance giant American International Group. The latest plan, announced Monday, marked the government's fourth effort to stabilize AIG.

Both Democratic and Republican lawmakers expressed skepticism over whether the action would work, said they were worried that more taxpayer money will be needed to rescue the company and demanded more accountability.

"I share your anger," Bernanke said. The government didn't really have a choice but to take the action because a collapse of AIG would have grave implications for the country's already fragile economic and financial health, he added.

"We're no better off," huffed Sen. Jim Bunning, a Kentucky Republican. "The bottom line: the Fed and the Treasury will leave the door open for more bailouts in the future."

President Barack Obama's recently enacted $787 billion stimulus package of increased federal spending and tax cuts should help revive moribund consumer demand, boost factory production over the next two years and "mitigate the overall loss of employment and income that would otherwise occur," Bernanke said.

However, the Fed chief warned that the timing and magnitude of the impact of the stimulus package is subject to "considerable uncertainty, reflecting both the state of economic knowledge and the unusual economic circumstances that we face."

The recession, now in its second year, is inflicting more damage to the economy daily as layoffs mount and companies cut production.

The U.S. economy contracted at a staggering 6.2 percent in the final three months of 2008, the worst showing in a quarter-century, and the Fed has said it will probably shrink during the first six months of this year. Recent economic barometers "show little sign of improvement," Bernanke said.

The nation's unemployment rate in January jumped to 7.6 percent, the highest in more than 16 years. And the number of newly laid-off people signing up for unemployment benefits has risen since mid-January, "suggesting that labor market conditions may have worsened further in recent weeks," Bernanke said.

The government will release February unemployment data on Friday and many economists are predicting the unemployment rate rose to 7.9 percent last month while employers cut nearly 650,000 jobs.

With jobs vanishing, nest eggs cracking and home values tanking, consumers have reined in their spending. That has forced companies to lay off workers, trim production and cut back in other ways. It's a vicious circle of negative forces that feed on each other, deepening the recession.

In back-to-back appearances on Capitol Hill last week, Bernanke planted a seed of hope that the recession could end this year if the government was successful in turning around wobbly financial markets. But the Fed chief didn't repeat that remark in Tuesday's testimony.

Bernanke said the government has made some progress on the financial front since last fall, but he told lawmakers that more needs to be done.

"We still haven't figured out a way to rid the banking system of its toxic assets and the banking system is really the heart of the body," Liz Ann Sonders, chief investment strategist at Charles Schwab and Co., told CBS News.

On Monday, the government threw floundering insurance giant AIG another $30 billion lifeline, raising the company's total federal aid received to $170 billion. AIG's record quarterly loss of over $60 billion sent the Dow Jones industrials diving well below 7,000, hitting a mark not seen since 1997.

On Tuesday, though, markets appeared to steady themselves after the massive selloff.

The Obama administration has revamped a $700 billion financial bailout program aimed at strengthening banks, but has said additional money could be needed.

Obama's first budget holds out the possibility of spending $250 billion more for additional financial industry rescue efforts.

"Whether further funds will be needed depends on the results of the current (stress tests) of banks, the evolution of the economy and other factors," Bernanke said.

Meanwhile, The Federal Reserve on Tuesday rolled out a much-awaited program aimed at boosting the availability of credit to U.S. consumers and small businesses.

The Fed will lend up to $200 billion to spur consumer lending - for autos, education, credit cards and other things. The bold program, dubbed the Term Asset-Backed Securities Loan Facility, was first announced late last year and originally scheduled to start in February.

[payasyougo]

"The effectiveness of a string of radical actions taken by the Fed, the Treasury Department and other agencies to stabilize markets "will be critical determinants of the timing and strength of the recovery," Bernanke said in testimony to the Senate Budget Committee."
____

Really? So please tell me exactly what needs to be done and when that action will work.

You can't. Because you don't know. Which means that everything out of your mouth is suspect.

Spend one billion and create about four hundred special streamlined bankruptsy processing centers between CA, FL, NV and AZ and spend the next 60 days fixing the problem so the remaining 93% of the country can move on.

Or, keep throwing money into the black hole and then pass a bunch of unrelated pork spending and continue to watch the problem spread so everyone feels the pain of those 5-7% of the population that lived beyond their means.

[philabias]

They bailout and the market dives, they bailout again and it dives deeper further, they bailout again and the market drops like a rock
Anyone see the pattern
Obama dont and he will spend and spend and spend and it will all be money lost and noway to get it back because those that must fail will fail no matter how mush you through down the Obama Hole Americans wont invest in Obamas socialist states of America . WE that can invest will invest elsewhere to keep America free of socailism
1416 days to go

[payasyougo]

Five months now and counting.

Stop wasting taxpayer money and let the bankruptsy courts be the bank of troubled assets. $1B beefing up or creating a special streamlined bankruptsy court system will get this over quicker, more efficiently and at less cost to the taxpayer (which I resemble).

[cdwalker]

Like this guy has any cedibility. He is just the face of a group of people who have caused a lot of the problems we are in. Inflation makes the rich rich and the poor poorer because the poor have very little in assets, which decrease as inflation goes up. The rich, the top 2% of people, have the most in the form of assets, which increase as inflation goes up. That is all inflation is, a financial tool to keep wealth from moving around. What was the quality of living like for all Americans when houses were 10-15k and cars were 3 to 5k?

[stevador39]

Bernanke, Paulson and Geithner are thieves and the operate for Wall Street scum. The wealth of this nation is from its vast natural resources, its agriculture and its industry. Financials are means used by con artists to deprive the people who work of the fruits of their labor.

[noloyalisti]

Government aid is NOT socialism. However, unbridled "free"-market capitalism that is unregulated is what caused this fiasco. The unregulated part, championed by Bushoccio and his Crime Family was the straw that broke the camel's back.

We have been brainwashed, through corporate fascist propaganda, that ANY government oversight is socialism. In face, we have always had social programs and thus some form of socialism. The fact is that the socialism has been set up to favor the rich, the politicians and the corporations, always at the expense of the working, poor and middle classes.

At least we see now we have a CLASS war here. And the THEORETICAL free market policies of Reagan, Norquist and Friedman are a farce, a fiasco and a failure.

[pensacola8-2009]

Republicans even know that we can't allow the banking system to fail, or it would be the sure ticket into socialism and the end of capitalism for this country.

There has never been any free or capitalist country that survived after allowing it's banks to fail.

Permitting banks to fail is equivalent to closing the doors of government and having no more country with a constitutional government.

China was lured into the socialist revolution in 1949 after the Chinese said, "It's time to end the banking system that never benefits common people". The rest is history.

When someone writes or broadcasts on the radio or TV, that banks should be allowed to fail, every educated elected leader knows that is not possible, unless we don't want to have a capitalist country.

Republicans even know that we can't allow the banking system to fail, or it would be the sure ticket into socialism and the end of capitalism.

Treating the banking system like a retail business is not an option and reflects poor business education of the speaker or writer.

[dprice123-2009]

Ben is good at making predictions....However most of his have been wrong. I have a credit rating 0f 722 and a bankruptcy filing in 2005. I have not received one credit card offer since 9/12/08.When before that date I was getting them weekly. I think the banks know more than what they are saying.

[sdemaggie]

Well, is it time to discuss the role the credit ratings firms played in this charade. Liquidation of AIG is in cards. Who is Bernanke protecting by proping up AIG?

Let the CDS's default. Where is the cash from the sale of AIG financial instruments? AIG reports a realized loss of $21B. Well, where's the cash from the sale of the securities? The loss is reported. How much cash was raised? The market is down due to the requirement of firms such as AIG to get liquid to meet the covenants of their ill conceived contracts. No more taxpayer money for AIG, liquidate AIG.

[gold_standard]

It's a mad, mad, mad, madoff world!

[trillion1]

I wouldn't expect to hear anything else from this jerk. More trickle down economics. These people were given hundreds of billions and kept it. If this money had reached Main St. it would be circulating in the economy right now not around the big banking and insurance houses.

[platteman]

If you stupid people, Bernake and others had put any strings on the money, we wouldn't be in this situtation. If you hadn't bailed them out, we wouldn't be in this situtation. If you were not so greedy, bernakie et all, would wouldn't be in this problem.
So let them fail, clean up the mess and then go on and then the problem would be solved.

[123chemical321]

I strongly believe that short sellers are manipulating the stock market resulting in a heretofore unprecedented volitility and record deterioration in value of our financial institutions. I recommend, therefore, a hiatus of at least one year in short selling (or new guidelines for these sales) which would give breathing space for investers to see the real value of the total market place. The recovery needs time to see the benefits of the stimulus program without the undue pressure of these manipulative institutions or indiviuals.

[inketolstoy]

"Meanwhile, The Federal Reserve on Tuesday rolled out a much-awaited program aimed at boosting the availability of credit to U.S. consumers and small businesses. "

"Much awaited program?" From my prospective (albeit fairly limited to my geographic and social strata) most consumers and small business owners are tightening up and not looking to Washington to save the day. Most look at federal help as just digging the grave a few inches deeper. Passing out more bullets insn't going to get the shell schocked troops up out of their holes and on the attack again.