US economy on verge of recovery: Fed chief

Prospects for a return to growth around the globe in near term appear good, he says

FEDERAL Reserve chairman Ben Bernanke said yesterday that the US economy is on the verge of a long-awaited recovery after enduring a brutal recession and the worst financial crisis since the Great Depression.

Economic activity in both the United States and around the world appears to be 'levelling out', and 'the prospects for a return to growth in the near term appear good', Mr Bernanke said in a speech at an annual Fed conference here.

Major stock indicators surged more than one per cent in early trading yesterday, including the Dow Jones industrials, which rose about 135 points.

The Dow had been up about 50 points prior to Mr Bernanke's comments. Meanwhile, Treasury prices tumbled, pushing yields sharply higher, as investors no longer needed the safety of government debt.

Mr Bernanke's upbeat assessment was consistent with the Fed's observations earlier this month as it took a small step towards pulling back some emergency plans to revive the economy.





Still, Mr Bernanke stressed yesterday that despite much progress in stabilising financial markets and trying to bust through credit clogs, consumers and businesses are still having trouble getting loans. The situation is not back to normal, he said.

Restoring the free flow of credit is a critical component to a lasting recovery. 'Although we have avoided the worst, difficult challenges still lie ahead,' Mr Bernanke told the gathering. 'We must work together to build on the gains already made to secure a sustained economic recovery.'

Strains in financial markets worldwide persist. Financial institutions face 'significant additional losses' on soured investments and many businesses and households are experiencing 'considerable difficulty' in getting loans, he said.

The Fed chief's remarks come two years after the financial crisis broke out and nearly one year after it had deepened to the point of sending the nation into a near meltdown. The bulk of Mr Bernanke's speech was a chronicle of the extraordinary events of the past year. Financial markets took a turn for the worst starting last September and into October, nearly shutting down the flow of credit.

The crisis felled storied Wall Street firms and forced the government to take over mortgage giants Fannie Mae and Freddie Mac, as well as insurance titan American International Group Inc.

Despite efforts to save it, Lehman Brothers failed. It filed for bankruptcy on Sept 15, the largest in corporate history, which roiled markets worldwide.

To prop up shaky banks, the government created a US$700 billion bailout fund, a programme that proved wildly unpopular with an American public suffering fallout from the recession.

The Fed swooped in with unprecedented emergency lending programmes to fight the crisis. It eventually slashed a key bank lending rate to a record low near zero. And Congress enacted programmes to stimulate the economy, the most recent coming in February with President Barack Obama's US$787 billion package of tax cuts and increased government spending.

'Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major firms would have failed and the entire global financial system would have been at serious risk,' Mr Bernanke said.

Unlike in the 1930s, Washington policymakers this time acted aggressively and quickly to contain the crisis, said Mr Bernanke, a scholar of the Great Depression. 'As severe as the economic impact has been, however, the outcome could have been decidedly worse.'

Global cooperation in battling the crisis was crucial, with central banks slashing interest rates and the US and other governments delivering fiscal stimulus, he noted.

'The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge,' the Fed chief observed.

Sponsored by the Federal Reserve Bank of Kansas City, the conference draws a virtual who's who of the financial world - Mr Bernanke's counterparts in other countries, academics and economists. -- AP

Source: Business Times, 22 Aug 2009