Bernanke says recession to linger
Tue Feb 24, 2009 8:27pm EST
By Mark Felsenthal and Alister Bull
WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke warnedon Tuesday the "severe" U.S. recession could drag into next year, butsaid banks should be able to weather the downturn without beingnationalized, cheering markets.
"I don't see any reason to destroy the franchise value or to createthe huge legal uncertainties of trying to formally nationalize a bankwhen it just isn't necessary," Bernanke told the Senate BankingCommittee.
"What we can do is make sure they have enough capital to fulfilltheir function and at the same time we exert adequate control to makesure that they are doing what is necessary to become healthy and viableover the longer term," he added.
U.S. stocks, which hit a 12-year low on Monday, jumped as investorsset aside fears bank shareholders could get wiped out as the governmentmoves to prop up the sector. The broad Standard & Poor's 500 Indexshot up 4 percent.
"The plan out of the administration with Bernanke's backing seems tohave some rationality and the market is factoring that there issomething here that might potentially work," said Greg Palmer, head ofequity trading at Pacific Crest Securities in Portland, Oregon.
Still, Bernanke was somber in his assessment of the economy. Ifefforts to stabilize banks failed, he said, the fast-shrinking economycould enter a mutually reinforcing cycle of weak growth and financialstrain.
"To break the adverse feedback loop, it is essential that wecontinue to complement fiscal stimulus with strong government action tostabilize financial institutions and financial markets," he said.
"If actions taken by the administration, the Congress and theFederal Reserve are successful in restoring some measure of financialstability -- and only if that is the case, in my view -- there is areasonable prospect that the current recession will end in 2009 andthat 2010 will be a year of recovery," Bernanke added.
BANKS CAN BE STABILIZED
The U.S. housing bust has saddled banks worldwide with big losses,leading them to cut back on lending, weakening economies. Governmentsare grappling with how best to restore the financial system to healthand revive economic growth.
In the United States, policy-makers are moving into the second phaseof a $700 billion financial rescue program, with plans to invest inbanks that need capital in return for preferred shares that couldconvert over time to common stock.
"We are committed to ensuring the viability of all major financial institutions," Bernanke said.
U.S. regulators will begin "stress tests" at the nation's 19 largestbanks on Wednesday. Bernanke said the tests aim to judge whether bankscan keep lending even under unexpected economic strains.
Regulators want "to ensure that even in a bad scenario, banks willhave enough capital, including enough common equity, to meet theirobligations to lend," Bernanke said.
He expressed faith that authorities were on the right path in taking time to fully diagnose the health of the top banks.
"Our major banks have significant franchise values," Bernanke said."There is no commitment by any means to never shut down a big bank,absolutely not, but I do believe that the major banks we have now canbe stabilized."
GLOBAL SLOWDOWN CRIMPING U.S. GROWTH
The Fed chairman warned that the global nature of the economicslowdown could sap U.S. exports and harm financial conditions to agreater degree than currently expected.
A slump in U.S. exports as world growth slowed last year added to adeep pullback in consumer spending that steepened the downward slide inthe U.S. economy.
Bernanke said the Fed, which has dropped rates to nearly zero, wouldkeep borrowing costs exceptionally low for some time and pledged to use"all available tools" to stimulate the economy and heal financialmarkets.
He said the central bank had not ruled out buying longer-term U.S.government bonds to drive down borrowing costs, but said its immediatefocus was on other steps to lower mortgage rates and spur consumerlending.
Some of the measures the central bank has already taken had helped ease tight conditions in some credit markets, Bernanke said.
"Nevertheless, despite these favorable developments, significant stresses persist," he said.
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