Bernanke Warns Recovery 'Close to Faltering'

By: Associated Press
By: Associated Press

"I think people are quite unhappy with the state of the economy and what's happening. They blame, with some justification, the problems in the financial sector for getting us into this mess. And they're dissatisfied with the policy response here in Washington. And at some level, I can't blame them."

Washington, D.C. (AP) - Europe has a debt crisis. America has a jobs crisis. Corporate profits could be in trouble. World financial markets are in turmoil. And no one seems prepared to ride to the rescue.

Federal Reserve Chairman Ben Bernanke bluntly warned Congress on Tuesday of what most of America has sensed for some time: The economic recovery, such as it is, "is close to faltering."

The central bank chief spoke on a day when the stock market spent most of the trading hours in bear market territory - down 20 percent from its most recent highs in April. A late-day rally helped the market finish higher.

Bernanke's exchange with lawmakers seemed to capture the growing belief that no one is prepared to help the global economy in any meaningful way anytime soon. Speaking in unusually frank terms, he also captured the nation's sour economic mood.

The Fed chief was asked about protests around Wall Street, which went on for an 18th day as demonstrators railed against corporate greed and expressed frustration over the economy.

Bernanke replied: "I think people are quite unhappy with the state of the economy and what's happening. They blame, with some justification, the problems in the financial sector for getting us into this mess. And they're dissatisfied with the policy response here in Washington. And at some level, I can't blame them."

"Certainly, 9 percent unemployment and very slow growth is not a very good situation," he added. "That's why they are protesting."

Throughout the day, traders and U.S. policymakers kept one eye on Europe, where a debt crisis has dragged on more than a year. Investors worry that a messy default by Greece could hurt European banks and their American counterparts.

On Tuesday, the Greek finance minister said the nation has enough money to pay pensions, salaries and bondholders through the middle of next month - and that was seen as good news. Bernanke told Congress there was little the Fed could do about Europe's problems.

"Unfortunately, we are innocent bystanders here," he said. "I am persuaded they are aware of the risks."

Bernanke said he believes the Fed's latest move to help the economy would be "meaningful but not an enormous support" for the economy. The program, known as Operation Twist, is designed to lower long-term interest rates so people and businesses will spend more money.

"It should help, somewhat, on job creation and growth," the Fed chief told Congress. "It's particularly important now that the economy is close, the recovery is close to faltering."

"We need to make sure that the recovery continues and doesn't drop back and that the unemployment rate continues to fall," he added.

The Fed has used most of its tools to help the economy. It said this summer that it expects to keep interest rates super-low into 2013. Congress is inclined to cut, not raise, spending. Europe is resisting bold steps to save its most troubled economies. And fears are rising that a recession is on the verge of seizing Europe and eventually spreading around the world.

"We have already taken interest rates down to zero ... and this Congress doesn't seem to be able to do anything," said David Wyss, former chief economist at Standard & Poor's. "So not much good is going to happen."

Investors seem to think so. Stocks sank early Tuesday on fears about Europe, before rising in late morning on Bernanke's suggestion that the Fed might be open to doing more to help.

Then they tumbled again in the afternoon, only to surge in the final 30 minutes of trading on a report that European leaders might be working on a plan to prop up banks there.

The Standard & Poor's 500 index finished the day up 2.3 percent at 1,123.95, or about 33 points above what would be considered bear market territory.

Economists at Goldman Sachs forecast in a note this week that Europe could fall into recession by winter. That would push the U.S. economy to "the edge of recession" by early 2012, said Andrew Tilton, an economist with the firm.

Even if a global recession can be avoided, the U.S. economy faces a bleak outlook. Some economists fear that Congress could worsen things by cutting taxes or raising taxes this year or next.

Tilton forecasts overall economic growth of just 1.7 percent this year, followed by a scant 0.5 percent annual rate in the first three months of next year. For all of 2012, he projects 1.4 percent growth. Normal growth is more like 3 percent.

European finance ministers suggested Tuesday that holders of Greek debt might have to absorb larger losses than originally thought. Banks that hold Greek bonds would suffer. A recession in Europe would also hurt U.S. exports to the region, damaging corporate profits at home.

Still, Wyss said, "Policy seems to be as frozen there as it is in Washington."

U.S. lawmakers have their own challenges with debt.

Congress is intent on cutting spending over the next several years. At the same time, Congress might let a Social Security tax cut expire at year's end. Income tax cuts could expire in 2012.

Based on those assumptions, economists at Bank of America Merrill Lynch expect growth below 2 percent this year, next year and in 2013.

For most Americans, such weak expansion would feel like a recession.

And it wouldn't reduce chronically high unemployment. The nonpartisan Congressional Budget Office said last month that the unemployment rate will remain near 9 percent through the end of 2012.

In his testimony, Bernanke said the Fed is prepared to support the economy. But he made clear that the Fed's efforts to force down long-term interest rates are no "panacea for the problems currently faced by the U.S. economy."

"Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector," Bernanke said.

Yet there is little likelihood of significant help from Congress.

President Barack Obama's $447 billion job-creation bill has run into resistance from Republicans and even some Democrats in Congress. House Majority Leader Eric Cantor says the Republican-led House won't vote on Obama's plan in its entirety.

Cantor said that while Republicans could back portions of the president's plan, "this all-or-nothing approach is unreasonable."

Obama is sharpening his strategy to blame Republican lawmakers if the bill, or at least a significant portion of it, doesn't pass by year's end.

The Fed may not be able or willing to adopt further stimulus. David Jones, chief economist at DMJ Advisors, a Denver consulting firm, said the Fed could decide at its policy meeting next month to take no further steps, especially because its past two policy decisions drew an unusually high three dissenting votes.

The dissenters have opposed the Fed's continuing efforts to force long-term rates ever lower. They worry about the risk of inflation and shrinking interest income for retirees and other savers.

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  • by Gerry Location: Tallahassee on Oct 5, 2011 at 06:00 AM
    @ mabien Florida does not have the recall. You might try to add it to the state constitution by initiative. Wisconsin has the recall. After 1 year in office, elected state officials can be recalled. This summer, 2 Republican state senators were recalled and replaced. The US is not defaulting. The US borrows for 10 years at 1.84%. Greece borrows for 10 years at 23.09%.
  • by You are a leading economist? on Oct 5, 2011 at 05:05 AM
    Then raise the interest rate. Banks are borrowing too cheaply and we will not have a national recovery until the rates return to the 2.5 - 4% range.
  • by remember this on Oct 5, 2011 at 04:24 AM
    When the 2012 elections roll around you need to remember this. Owebummer is an idiot and the people that he has surrounded himself with are morons too. We need to vote them out and send them packing. C'mon Herman Cain... Let's get some new blood up there - and not a career politician.
  • by The Breeze Location: Perry on Oct 5, 2011 at 04:18 AM
    Recovery? What recovery? As a small business owner, I've seen no evidence whatsoever of any recovery. It has simply gone from bad to worse.
  • by gaboy Location: ga on Oct 5, 2011 at 03:43 AM
    there is no recovery, no recession... we are headed to a great depression like no one has ever seen. things will never get any better till this finacial collapse takes place and we start over. wallstreet and the government has put us in this mess along with the greed of banks and big oil. you cannot compete on a golbal scale with the high wages in this country.
  • by Chris S Location: 32309 on Oct 5, 2011 at 12:31 AM
    "Bernanke said he believes the Fed's latest move to help the economy would be "meaningful but not an enormous support" for the economy. The program, known as Operation Twist, is designed to lower long-term interest rates so people and businesses will spend more money." This was a plan that was created by the Kennedy administration when banks didn't have the money to lend and long term rates were a concern. Today, banks have plenty to lend, but will not with the state of the economy. Operation Twist will not be beneficial to our recovery efforts because this is not 1963.
  • by What??? on Oct 4, 2011 at 11:49 PM
    Small business owners are the highest percentage of employers and Obamacare has them concerned about the future costs of doing business. Pres. Obama is demanding to increase taxes on those small business owners who make $250,000 or above. ALL businesses owners, small and large, are holding on to any profit they make because the current administration is causing fear and uncertainty to the future of their business.
  • by Anonymous on Oct 4, 2011 at 08:58 PM
    Get ready people. The second recession is being projected within the next 6 months. Banks and big business sitting on Trillions of dollars of cash money that they will not lend out or hire people with has all but put a stop to the current recovery. The repeat recession WILL have double digit unemployment greater than 10-12%. This mess and fault belongs to Congress with its 11% approval rating (lowest in history) and they must agree to fix it at all costs. Your 200.5k will soon be a 100.25k.
  • by Herp on Oct 4, 2011 at 08:14 PM
    Wait ... recovery?
  • by mabien on Oct 4, 2011 at 07:44 PM
    And yet Florida wants to RE-COPPER the top of the Capitol. Our country is defaulting, close to collapsing...and that's all Florida can think of to do. Not get ready to feed people, get ready for an outbreak of a virus, worry about children who may not have enough to eat...THEY WANT TO FREAKING RE-DO THE TOP OF THE CAPITOL. Can't we have a recall election right now? And also have an investigation to see who authorized this?
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