Bernanke: Governments Will Need to Do More

Federal Reserve Chairman Ben Bernanke said Tuesday fiscal stimulus alone would not be enough to promote a lasting U.S. economic recovery and that further steps to backstop banks may be needed.

Ben Bernanke

"Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system," Bernanke said at the London School of Economics.

In his first policy speech since early December, Bernanke said that while an expected fiscal stimulus package could provide a "significant boost" to the economy, the government may need to inject more capital into banks.

He also said a large quantity of distressed assets on bank balance sheets made it difficult for banks to raise capital and lend.

Bernanke said the government could consider buying troubled assets, providing asset guarantees or setting up a so-called bad bank to buy assets from banks in exchange for cash and equity.

"With the worsening of the economy's growth prospects, continued credit losses and asset markdowns may maintain for a time the pressure on the capital and balance sheet capacities of financial institutions," he said.

Global Economy Takes a Hit

Bernanke said the way in which governments respond to the financial crisis racking the global economy would determine the timing and strength of recovery.

"For almost a year and a half the global financial system has been under extraordinary stress--stress that has now decisively spilled over to the global economy more broadly," he said. "The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial."

Video: Ben Bernanke takes questions after his speech at the London School of Economics.

Bernanke said the Fed still has "powerful tools" that could be expanded to spur a rebound even though it has cut benchmark interest rates to near zero.

The Fed has chopped interest rates from 5.25 percent since September 2007 and has opened a range of lending facilities to stabilize markets and stimulate growth. The economy has been in recession since December 2007.

Bernanke said the Fed would make clear its intention to keep the benchmark federal funds rate low for an extensive period to combat the crisis, but stressed that that policy could change if conditions improve.

The Fed's unprecedented expansion of its balance sheet is calibrated to stabilize credit markets, he said. The Fed's strategy does not lend itself to targeting the quantity of excess bank reserves or the monetary base, Bernanke said.

"The Federal Reserve's credit-easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for businesses and households," he added.

While there are risks to aggressive easing of monetary policy, Bernanke said inflation is not an immediate concern.

"Overall inflation has declined significantly and appears ikely to moderate further," he said.

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