Bernanke: Obama Stimulus Helps, More Action Needed

To help on that front, the Fed is lending billions to financial companies and buying mounds of companies' debt to help bust through the debilitating credit clog. And the Treasury Department is overseeing a $700 financial bailout program that has pledged to inject $250 billion into banks in return for partial government ownership. Some government money also is being used to guarantee against possible losses from risky assets held by Citigroup Inc.

U.S. Federal Reserve chairman Ben Bernanke delivers a speech to the London School of Economics in...

U.S. Federal Reserve chairman Ben Bernanke delivers a speech to the London School of Economics in London, Tuesday Jan. 13, 2009. Bernanke said Tuesday the stimulus package being crafted by President-elect Barack Obama and Congress could provide a "significant boost" to the sinking economy. But he warned that such a recovery won't last unless other steps are taken to stabilize the shaky financial system. (AP Photo/Matt Dunham)

(AP)

Bernanke said "more capital injections and guarantees may become necessary" to stabilize financial markets and spur more lending. If Obama's incoming Treasury secretary Timothy Geithner decides to remove toxic assets from financial institutions' balance sheets — the original but abandoned strategy under the $700 billion bailout — Bernanke suggested some options to do that.

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Public purchases of the troubled assets are one way to go, he said. Another option is to provide asset guarantees under which the government would agree to absorb — presumably in exchange for warrants or some other form of compensation — part of the prospective losses on specified portfolios of rotten assets held by banks. Yet another approach would be to set up and capitalize so-called "bad banks," which would buy assets from the financial institutions in exchange for cash and equity in the bad bank.

One of the most pressing decisions that Geithner will face is exactly how to spend the second, $350 billion installment of the bailout fund and whether to resurrect the strategy — shelved by Bush's Treasury secretary Henry Paulson — of buying toxic assets held by banks.

Obama's transition team had no immediate comment Tuesday, but a letter from his incoming economic adviser Lawrence Summers to congressional leaders on Monday also called for a comprehensive approach — beyond the stimulus package — to deal with the crisis.

Obama's political skills will be put to a high-stakes test with Congress as he seeks assess to the second half of the $700 billion bailout pot. Congress has a 15-day deadline to reject the request, which Bush made on Obama's behalf on Monday.