Bernanke Says Bailout Will Need Time to Work

From: www.nytimes.com

By MICHAEL M. GRYNBAUM

Published: October 15, 2008

The chairman of the Federal Reserve, Ben S. Bernanke, warned on Wednesday that the American economy was headed toward an extended period of difficulty, despite worldwide efforts to stabilize the financial markets.
Ruth Fremson/The New York Times
Ben S. Bernanke, the chairman of the Federal Reserve, spoke to the Economic Club of New York on Wednesday.
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But he said federal officials had armed themselves with “the tools we need to respond with the necessary force to these challenges.”
“Broader economic recovery will not happen right away,” Mr. Bernanke said in a speech to the Economic Club of New York, even if financial markets stabilize “as we hope they will.”
But he said that “Americans can be confident that every resource is being brought to bear to address the current crisis.”

Mr. Bernanke, in his remarks, said that because of the worldwide downturn, “our export sales, which have been a source of strength, very probably will slow.”
The labor, housing and credit markets would also take time to recover, he said, and consumer spending and business investment remained weak.

Inflation, however, appeared to have “held steady or eased,” Mr. Bernanke said, citing the sharp drop in oil prices in the last few weeks. He said that stable prices, coupled with the broader downturn, would probably keep inflation in check, offsetting other problems.
“Although much work remains and more difficulties surely lie ahead,” Mr. Bernanke said, “I remain confident that the American economy, with its great intrinsic vitality and aided by the measures now available, will emerge from this period with renewed vigor.”

He added that, “ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning.”

The speech offered a chronological account of the financial crisis, with Mr. Bernanke emphasizing the adaptability and innovation of the triage efforts undertaken by the Treasury Department and the central bank. He said that, unlike in past crises, the government had responded quickly and aggressively.
“Waiting too long to respond has usually led to much greater direct costs of the intervention itself and, more importantly, magnified the painful effects of financial turmoil on households and businesses,” Mr. Bernanke said in his remarks. “That is not the situation we face today.”
“We will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity,” he said.

The Fed chairman also touched on one of the third-rail issues of the last several weeks: why the government allowed Lehman Brothers to collapse, the catalyst that set up the latest and most turbulent period of the current crisis. Some have argued that the government should have made more efforts to prevent the investment bank from filing for bankruptcy protection.

But Mr. Bernanke said that “a public sector solution for Lehman proved infeasible.”
“The firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid, and the Treasury did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman’s acquisition by another firm,” he said.
“Consequently,” he said, “little could be done except to attempt to ameliorate the effects of Lehman’s failure on the financial system.”