First and Foremost, Stabilize Banks: Bernanke

Federal Reserve Board chairman Ben Bernanke said before Congress Tuesday, the Obama administration was on the right track with its approach to troubled banks. “Over time these initiatives should further stabilize our financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery,” he said. According to Bernanke, Bank stability is where an end to the recession will begin. “If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability–and only if that is the case, in my view–there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,” he said. The outlook for economic activity is uncertain and risks are imminent, Bernanke said. Risk will arise from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected, he explained.  Another risk will derive from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing.  Bernanke said to break that adverse feedback loop, it is essential that the nation continues to complement fiscal stimulus with strong government action to stabilize financial institutions. But, “If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.” At the time of the last Monetary Policy Report, the nation faced high inflation and rising unemployment.  Since then, however, inflation pressures have receded while the rise in the unemployment rate has surged and financial conditions have deteriorated.  “In light of these developments, the Federal Reserve is committed to using all available tools to stimulate economic activity and to improve financial market functioning,” Bernanke said. The administration will begin Wednesday a new series of “stress tests” for the nation’s major banks. If regulators find the banks do not have sufficient capital, the government could demand a larger ownership stake in these institutions. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.