Bernanke supports new stimulus, warns of downturn

McClatchy NewspapersOctober 20, 2008 

WASHINGTON — Federal Reserve Chairman Ben Bernanke gave a qualified blessing Monday to congressional plans for a second economic stimulus, suggested more federal help for states and warned against raising taxes amid the economic turmoil.

Bernanke went before the House Budget Committee to discuss recent efforts to reverse the global financial crisis. Coming only two weeks before national elections, most lawmakers' questions carried a political tone.

Bernanke said in his opening remarks that the economy faced several more quarters of underperformance and that a new stimulus package would be "appropriate," although he emphasized that the aid must be structured to have immediate impact rather than to fund projects that take a long time to ramp up. A big part of the stimulus plan that Democrats are drafting would fund infrastructure projects.

Pressed by Rep. Rosa DeLauro, D-Conn., to give lawmakers direction on how big a stimulus plan should be, Bernanke responded that "I think it should be significant," without putting a price tag on it.

President Bush in February signed a $152 billion stimulus plan that provided rebate checks to consumers, whose spending drives two-thirds of U.S. economic activity. The new effort would be more focused on creating jobs.

The White House hasn't endorsed a second stimulus, but spokeswoman Dana Perino said on Monday that "we're open to ideas."

"There will be ample opportunity when Congress returns to consider whether additional fiscal stimulus is warranted, and if so, what form that should take," White House spokesman Tony Fratto told McClatchy. "So far, what we've heard from Democratic leaders does not sound like it would cause the economy to grow in the near term."

Bernanke suggested that any stimulus should target the frozen credit markets, which are reducing lending to consumers, businesses and state governments. He also supported calls for more aggressive efforts to halt the rising numbers of foreclosures nationwide.

The Fed chairman said that the stimulus plan perhaps could be structured to guarantee borrowing by state and local governments in the municipal bond market, which is now dysfunctional, as are other credit markets. California and Massachusetts are among the states that are complaining that the cost of borrowing in bond markets is getting prohibitively expensive.

"This might be an area where the federal government could assist state and local governments by helping them attract credit at lower rates," the Fed chief said.

DeLauro tried repeatedly to get Bernanke to say that the U.S. economy is in a recession, but the Fed chairman called that an academic question.

"We are in a serious slowdown in the economy . . . and whether it is called a recession or not is of no consequence," he said. Most economists assume that the economy is now in recession, which is defined as a contraction in a wide array of indicators including employment, consumption and industrial production.

When Rep. Paul Ryan, R-Wis., pressed the Fed chairman about the danger of raising taxes during the economic turmoil, Bernanke responded that "generally speaking, you would not want to have a net tax increase in the middle of a slowdown."

Both political parties are likely to use this response. Republicans will say that Bernanke warned against raising taxes, which would happen if Congress lets the tax cuts that passed earlier in the decade expire on schedule at the end of 2010.

Democrats can take from Bernanke's comments that he warned against "net" tax increases, meaning that Congress could let taxes rise on the wealthiest Americans — as Democratic presidential nominee Barack Obama favors, along with most Democrats in Congress — so long as other tax cuts offset those tax hikes.

Rep. Gwen Moore, D-Wis., asked the Fed chief whether, as conservative commentators suggest, the quasi-government mortgage finance giants Freddie Mac and Fannie Mae caused the financial crisis by encouraging lenders to make loans to poor people under a government mandate to make housing affordable.

"I think the main contribution Fannie and Freddie made (to the crisis) was having insufficient capital," Bernanke said, acknowledging that they didn't spark the bad lending that's mired the nation in the worst housing downturn in modern times.

Bernanke gave credence to some Republican complaints that the roaring 1990s reflected economic growth that wasn't sustainable. When Rep. Robert Scott, D-Va., asked him what was being done back then that isn't being done now, Bernanke answered by questioning the premise that stocks were correctly priced during the boom.

The implication in Bernanke's answer was that there was a stock-market bubble in the late 1990s that led to the dot-com crash and a brief recession.

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