Bernanke: Stimulus is good, but financial markets need help

WASHINGTON -- Federal Reserve Chairman Ben Bernanke on Tuesday said President-elect Barack Obama's massive stimulus bill could provide a significant short-term economic boost, but warned the government also might need to provide banks more capital or buy troubled assets to ensure lasting recovery.

In a wide-ranging speech to the London School of Economics, Bernanke said it may be necessary to provide more capital injections and loan guarantees to banks and financial firms to stabilize credit markets. "The timing and strength of the (global) recovery are highly uncertain." While he expects continued job losses in the near term, Bernanke is hopeful that later in 2009 the economy should see "at least stability and a stop to the bleeding. It takes awhile for labor markets to recover, however."

Bernanke, who didn't weigh in on the details of the evolving U.S. economic stimulus package, made clear that it is should be only part of a broader government response to combat the worst financial crisis to hit the U.S. and the global economy since the 1930s.

"The incoming administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity," Bernanke said.

"In my view, however, fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system," he warned. "History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively."

He laid out possible ways the Obama administration could buy troubled assets from lenders, and help the struggling housing market, using the remaining $350 billion of the historic $700 billion financial bailout approved by Congress last year.

While the original purpose of the financial rescue program was to buy troubled assets, the Treasury Department instead used the money to inject capital into banks, hoping that would encourage them to lend. Now, Bernanke appears to be suggesting that policymakers return to the original intent of the plan. The Fed has announced some moves to buy assets, like mortgages, to inject cash into credit markets, but the Fed has not been buying the most risky products.