Bernanke urges bold action on economy

WASHINGTON -- Federal Reserve Chairman Ben Bernanke told Congress Tuesday that any hope for an economic recovery will hinge on the government's ability to prop up shaky financial markets.

The effectiveness of a string of radical actions taken by the Fed, the Treasury Department and other agencies to stabilize markets "will be critical determinants of the timing and strength of the recovery," Bernanke said in testimony prepared for the Senate Budget Committee.

"We are better off moving aggressively today to solve our economic problems," he said.

"The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment and incomes for an extended period," he said.

The Fed chief found himself on the hot seat when lawmakers voiced concerns the government's new $30 billion lifeline for ailing insurance giant American International Group. The latest plan, announced Monday, marked the government's fourth effort to stabilize AIG.

Both Democratic and Republican lawmakers expressed skepticism over whether the action would work, said they were worried that more taxpayer money will be needed to rescue the company and demanded more accountability.

"I share your anger," Bernanke said. The government didn't really have a choice but to take the action because a collapse of AIG would have grave implications for the country's already fragile economic and financial health, he added.

"We're no better off," said Sen. Jim Bunning, a Kentucky Republican. "The bottom line: The Fed and the Treasury will leave the door open for more bailouts in the future."

President Obama's recent budget proposal projects an explosion of the budget deficit to $1.8 trillion, and a rise in the debt-to-GDP ratio to about 60% from 40%, the highest level since the early 1950s.

"All else equal, this is a development that all of us would have preferred to avoid," Bernanke said.

The president's recently enacted $787 billion stimulus package of increased federal spending and tax cuts should help revive moribund consumer demand, boost factory production over the next two years and "mitigate the overall loss of employment and income that would otherwise occur," Bernanke said.