Bernanke Says Stimulus Alone Won't End Crunch

By JULIA WERDIGIER
The New York Times
Published: Jan 14, 2009

LONDON — The chairman of the Federal Reserve, Ben S. Bernanke, said Tuesday in London that a fiscal stimulus package being discussed by the incoming administration would help revive the economy but would not be enough to lead to a lasting recovery.

“The incoming administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity,” Mr. Bernanke said.

But “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Mr. Bernanke said in a speech at the London School of Economics on Tuesday. “A modern economy cannot grow if its financial system is not operating effectively.”

Mr. Obama is developing an $800 billion recovery plan that is a mixture of increased government spending, including a infrastructure projects, as well as tax cuts.

While Mr. Bernanke said the Federal Reserve has already done a great deal to help stimulate the economy — like lowering its benchmark interest rate to virtually zero in December — it still has “powerful tools” at its disposal.

As the economic outlook continues to worsen even after the Treasury’s injection of about $250 billion into the banking sector, Mr. Bernanke said more capital injections and guarantees might become necessary.

He outlined several options to help financial institutions with their troubled and hard-to-value assets that continue to be a barrier to private investment in the companies.

He mentioned public purchase of troubled assets, providing asset guarantees and the creation of a so-called bad bank among the options.

Mr. Bernanke reiterated the need for “stronger supervisory and regulatory systems” while being careful not to introduce rules that would “forfeit economic benefits of financial innovation and market discipline.”

“Even as we strive to stabilize financial markets and institutions worldwide, however, we also owe the public near-term, concrete actions to limit the probability and severity of future crises,” he said.

Among those, he said, were stronger supervisory and regulatory systems with clear lines of responsibility, as well as oversight powers to curb excessive leverage and risk-taking.

“Particularly pressing is the need to address the problem of financial institutions that are deemed ‘too big to fail,’ ” Mr. Bernanke said. “It is unacceptable that large firms that the government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period.”

“In the future,” he said, “financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking.”

In addition, he said, “We should revisit capital regulations, accounting rules, and other aspects of the regulatory regime to ensure that they do not induce excessive procyclicality in the financial system and the economy.” The Fed chairman also called for a renewed effort to cooperate across borders, saying “the world is too interconnected for nations to go it alone in their economic, financial, and regulatory policies.”

His comments came a day after President Bush formally requested, at the urging of Mr. Obama — that Congress release the second half of the $700 billion financial system bailout fund that it passed earlier. Republican and Democratic Senate leaders have signaled that they would support the release of the $350 billion, despite anger among many rank-and-file lawmakers over the Bush administration’s management of the program.

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