'Black and white' solution starts with stable institutions, Fed chief says
Federal Reserve Board chief Ben Bernanke delivered a simple message Tuesday: Fix banks first and economic rowth will follow.
"If there is one message that I'd like to leave you with, if we're going to have a strong recovery, it has got to be on the back of a stabilization of the financial system. It is black and white," Bernanke told the Senate Banking Committee.
"If we don't stabilize the financial system, we're going to flounder for some time," said the top U.S. central banker.
Appearing before Congress for two days of discussion on the economic outlook, the Fed chairman said the Obama administration was on the right track with the approach it's taken to reviving ailing banks during its first month in office.
While that plan wasn't well received by financial markets, Bernanke said it should work -- given sufficient time.
The Obama plan "has all the major components ... of previous successful financial stabilization plans. So I think if it is well executed and forcefully executed, it is our best hope of stabilizing the system," he said.
But what the final expense of the rescue plan will be to taxpayers remains unclear, he conceded, saying: "We don't know what the costs will be."
It will take more time and money to work, he said.
The administration will begin Wednesday a new series of "stress tests" for the nation's major banks. If regulators find they don't have adequate capital, the government could demand a greater ownership stake in the institutions. See full story.
Bank stability stands as the key ingredient for ending the recession, Bernanke said.
Only with the return of some measure of financial stability is there a "reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," Bernanke said.
If financial conditions improve, the stimulus package and ultra-low interest rates will support growth and low gasoline prices will support consumer spending.
A full recovery from the severe downturn is not expected for two or three years, Bernanke said.
At the moment, downside risks to the forecast predominate, Bernanke said.
The soft economy and weak financial institutions are still caught in downward spiral with the potential to wield tremendous "destructive power," he said.
This cycle, known in Fed parlance as an "adverse feedback loop," was one of the worst fears of Fed officials in 2007 and 2008. The fact that it has arrived with such force has officials scrambling for a response.
"To break the 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.
The global nature of the recession is another downside risk, Bernanke said. This may drag down U.S. manufacturing and financial markets more than expected, he said.
