Fed Chair Calls for More Government Stimulus

October 20, 2008 - 2:25 PM
Federal Reserve Chairman Ben Bernanke told Congress Monday a fresh round of government stimulus is a good idea because there's a risk the country's economic weakness could last for some time.
Washington (AP) - Federal Reserve Chairman Ben Bernanke told Congress Monday a fresh round of government stimulus is a good idea because there's a risk the country's economic weakness could last for some time.
 
Bernanke's remarks before the House Budget Committee marked his first endorsement of another round of energizing stimulus, something that Democrats on Capitol Hill have been pushing. The Bush administration, however, has been cool to the notion.
 
"With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," Bernanke testified.
 
Repeatedly pressed for how large the stimulus package should be, Bernanke demurred, saying that was up to Congress - along with the exact components. However, he said the size should be "significant."
 
A trio of hard blows from the housing, credit and financial crises has badly pounded the economy.
 
Many analysts predict the economy will shrink later this year and early next year, meeting the classic definition of a recession. Some believe the economy already jolted into reverse during the July-to-September quarter.
 
"We are in a serious slowdown for the economy ... whether it is called a recession or not is of no consequence," Bernanke said.
 
The nation's unemployment rate - now at 6.1 percent - could hit 7.5 percent or higher by next year, according to some predictions.
 
Bernanke suggested that Congress design the stimulus package so that it will be timely, well targeted and would limit the longer-term affects on the government's budget deficit, which hit a record high in the recently ended budget year.
 
Any stimulus package would need to kick in quickly to entice people and businesses to boost spending and buck up the economy during the period in which economic activity would be otherwise weak, Bernanke said.
 
Bernanke said the package also should include provisions that would help break through the stubborn credit clog that is playing a major role in the economy's slowdown.
 
"If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers," Bernanke said. "Such actions might be particularly effective at promoting economic growth and job creation," he added.
 
House Speaker Nancy Pelosi has said an economic recovery bill could be as large as $150 billion. Economists have told leading Democrats the plan should be twice the size.
 
In an interview with The Associated Press on Friday, Pelosi said Congress is unlikely to approve a tax rebate before President Bush leaves office, however. She signaled that prospects are dim for a post-election session to pass an economic aid package.
 
Democrats have already called for a $61 billion package of jobless aid and spending, and are looking at adding to it as the financial meltdown exacerbates the economic crisis.
 
Earlier this year, Congress enacted a $168 billion stimulus package that included tax rebates for people and tax breaks for businesses. The rebate checks of up to $600 per person did help to lift economic growth in the spring. However, consumers cut back sharply as rising unemployment, harder-to-get credit, shrinking paychecks and falling home values made people much more cautious. In turn, businesses - worried about customers' flagging appetites - also have retrenched.
 
Bernanke's nod for another round of stimulus comes after a flurry of drastic actions by the Federal Reserve and the Bush administration has yet to unlock lending and calm financial markets.
 
Banks fear lending money to each other and to their customers, creating the worst financial crisis since the Great Depression. Businesses are reluctant to hire and boost capital investments. Consumers have hunkered down. All the economy's problems are feeding off each other, creating a vicious cycle that Washington policymakers are finding difficult to break.
 
The Fed chief appeared to leave the door open to additional interest rate reductions.
 
The central bank meets next on Oct. 28-29 and many economists believe Fed policymakers will lower rates again then to brace the wobbly economy.
 
Over time, "stimulus provided by monetary policy" along with the eventual stabilization in housing markets and improvements in credit markets will help the economy get back on firm footing, Bernanke said.
 
The Fed and the world's other major central banks recently joined forces to slice interest rates, the first coordinated action of that kind in the Fed's history. That action dropped the Fed's key rate to 1.5 percent, from 2 percent.
 
"The time needed for economic recovery, however, will depend greatly on the pace at which financial and credit markets return to more-normal functioning," Bernanke said. "Because the time that will be needed for financial normalization and the effects of ongoing credit problems on the broader economy are difficult to judge, the uncertainty currently surrounding the economic outlook is unusually large."