Federal Reserve Chairman Ben S Bernanke said policy makers may need to expand aid to the banking system beyond the $700 billion already approved and take other aggressive measures even at the cost of soaring fiscal deficits.
“Without a reasonable degree of financial stability, a sustainable recovery will not occur,” the Fed chairman said today in testimony prepared for the Senate Budget Committee. “Although progress has been made on the financial front since last fall, more needs to be done.”
Bernanke’s comments suggest he sees a role for bigger federal outlays as the Obama administration seeks congressional approval for a budget of $3.55 trillion for the fiscal year beginning in October. President Barack Obama has already signed into a law a $787 billion economic stimulus package of tax cuts and government spending.
Obama’s first budget seeks standby authority for as much as $750 billion in new aid to the financial industry. Whether those funds will be needed “depends on the results of the current supervisory assessment of banks” and the evolution of the economy, Bernanke said.
Bernanke said policy makers would have “preferred to avoid” what is likely to be the largest ratio of federal debt compared with gross domestic product since the end of World War II, and he urged lawmakers not to lose sight of fiscal discipline.
“But our economy and financial markets face extraordinary challenges,” and doing less now would eventually prove to be more costly, he said. “We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of stagnation” that would cause budget deficits to swell further, increase unemployment and undermine incomes “for an extended period.”
The Fed has more than doubled its assets to $1.9 trillion during the past year by expanding loans to banks, launching programs to revive commercial paper and other markets and backing the merger of Bear Stearns Cos with JPMorgan Chase & Co.
The 55-year-old Fed chairman told the Senate Banking Committee last week there’s a “reasonable prospect” the recession will end in 2009 “if the actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measures of financial stability.”
