On the heels of comments from President Barack Obama and top adviser Larry Summers that there are "glimmers of hope" in the economy and the sense of economic "free-fall" is ending, Federal Reserve chairman Ben Bernanke says today that he sees "tentative signs" that the nation's financial decline is "slowing."
"Recently we have seen tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, homebuilding, and consumer spending, including sales of new motor vehicles," Bernanke says in prepared remarks for his speech this afternoon at Morehouse College in Atlanta.
"I am fundamentally optimistic about our economy," he adds.
"In the spirit of the holiday, today I will pose and answer four important questions about the financial crisis," he notes.
Question 1 - How Did We Get Here?
As Bernanke explains it, years ago many financial institutions, with a surplus of funds in the market, were competing aggressively for lenders. The intense competition led some institutions to engage in careless lending. But when the credit boom ended in 2007 due to problems in the subprime mortgage market, things quickly took a turn for the worse.
Foreclosures rose. Lending froze up. Last fall several major financial institutions either failed or came close to failing. Investors lost confidence and stocks plummeted.
"Declining stock values, a teetering financial system, and difficulties in obtaining credit triggered a remarkably rapid and deep contraction in global economic activity and employment, a contraction that has persisted through the first months of 2009," Bernanke says.
Question 2 - What Is the Fed Doing to Address the Situation?
Bernanke points out that the Fed has reduced its key interest rate down to essentially zero and expects to keep it low "for an extended period."
The Fed, he notes, has also taken additional steps, such as providing short-term credit to sound financial institutions as needed and starting lending programs such as the TALF to free up credit for households and small businesses, especially in the form of auto loans, credit card loans, and student loans.
Significant Questions About the Financial Crisis
Question 3 - Does the Fed's Aggressive Response Risk Inflation Down the Road?
In recent weeks, there have been increased concerns about the risks of inflation. Bernanke's message: not to worry.
While he acknowledges that all the liquidity the Fed has injected into the system could "pose an inflationary threat," Bernanke says that the Fed will act to remove some of that liquidity and raise the federal funds rate again.
"I can assure you that monetary policy makers are fully committed to acting as needed to withdraw on a timely basis the extraordinary support now being provided to the economy, and we are confident in our ability to do so," he says.
For now, he says, "Our best forecast is that inflation will remain quite low for some time."
Question 4 - Why Did the Fed and the Treasury Act to Prevent the Bankruptcy of Some Major Financial Firms?
Bernanke says the failure of American International Group would have posed financial and economic risks "at least as great" as last fall's failure of Lehman Bros, which caused "waves of panic and fear" in the markets.
An AIG failure, he warns, would have led to "a further sharp decline in confidence in the global banking system and possibly to the collapse of other major financial institutions."
"At best, the consequences of AIG's failure would have been a significant intensification of an already severe financial crisis and a further worsening of economic conditions," he emphasizes. "Conceivably, its failure could have triggered a 1930s-style global financial and economic meltdown, with catastrophic implications for production, incomes, and jobs."
Accordingly, the Federal Reserve and the Treasury Department agreed that these risks were "unacceptable" and bailed out AIG to the tune of over $180 billion.
To prevent future occurrences of such a predicament, Bernanke today reiterates his calls for regulatory reform, namely strong government oversight and a new set of federal regulatory procedures.
The Fed chief will deliver his remarks at 1:30 p.m. ET in Georgia, followed by a question-and-answer session.
ABC News' Charlie Herman contributed to this report.