Make us your home page

Fed chief says economic rebound possible in 2010

WASHINGTON — Federal Reserve Chairman Ben Bernanke on Tuesday offered a sliver of optimism in a time of gloom, saying in carefully hedged comments that growth could return next year if the financial system is put in order.

In congressional testimony, Bernanke depicted an economy undergoing a "severe contraction." But he said the recession could end in 2009, paving the way for a "year of recovery" in 2010.

Any turnaround, the Fed chairman made clear, will depend on whether government efforts succeed in stabilizing the financial markets.

Wall Street soared on Bernanke's remarks, with the Dow Jones Industrial Average rising 236 points, or 3.3 percent. The Standard & Poor's 500-stock index and the Nasdaq composite index both rose about 4 percent, even as new data showed that consumer confidence hit an all-time low and home prices continued dropping at a record pace in December.

Though he lingered over the seriousness of the financial crisis, Bernanke buoyed investors in part by stating his resistance to any nationalization of the big banks. The prospect of the government taking up to a 40 percent stake in Citigroup in return for more assistance has pushed the idea to the fore.

"We don't need majority ownership to work with the banks," he told the Senate Banking Committee in his semi-annual testimony on monetary policy and the economy, arguing that federal agencies have enough supervisory power to nurse banks back to full health. Taking over banks more formally would needlessly "destroy the franchise value" of the institutions, he said.

Any economic recovery next year could be weak, both Bernanke and private economists acknowledge, probably with continued high unemployment. The economy faces major risks from a deepening global recession and a reinforcing cycle of economic weakness and financial frailty.

The situation is "basically black and white," Bernanke said. "If we stabilize the financial system adequately, we'll get a reasonable recovery. … If we don't stabilize the financial system, we're going to founder for some time."

Diane Swonk, chief economist at Mesirow Financial, agreed there could be a rebound next year. "You can get growth in 2010, but maybe not strong enough growth that people really feel the benefits," she said.

But unlike many other economists, Bernanke is arguing that if the financial system fails to return to function normally, it is out of the question that the economy could recover.

"That's a bit extreme," said Michael Feroli, an economist with J.P. Morgan Chase. "Everyone knows that Bernanke built his name as an academic on how important the financial sector is for the real economy. But the emphasis he put on it today stretches the case."

Bernanke's comments also seemed to acknowledge that there is no guarantee that federal efforts to stabilize the financial system — including government investments in banks and Fed lending to all types of entities — would be enough. That could even be viewed as a signal to Congress that any requests for more money and authority should be approved in the interest of bringing stability to financial institutions.

The government has taken considerable steps to address the recession, with the Fed cutting the short-term interest rate it controls to essentially zero and the Obama administration winning congressional approval of a major stimulus package.

In a sometimes spirited give-and-take on Tuesday, Bernanke offered a metaphor to defend the government's efforts to bail out institutions and homeowners who have gotten into financial trouble. "If your neighbor smokes in bed and sets his house afire and you live in a neighborhood of closely packed wooden houses, you could punish him very severely by refusing to send the fire department. And then he would probably learn his lesson about smoking in bed. But unfortunately, in the process you would have the entire neighborhood burning down."

Bernanke's preference, he said, would be to put out the fire and set tougher rules to prevent fires in the future.

Information from the New York Times was used in this report.

Fed chief says economic rebound possible in 2010 02/24/09 [Last modified: Tuesday, February 24, 2009 11:17pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Washington Post.

Join the discussion: Click to view comments, add yours