Page last updated at 15:57 GMT, Tuesday, 13 January 2009

Obama plan 'would lift economy'

Ben Bernanke gave his view on fiscal stimulus packages

The stimulus package proposed by President-elect Barack Obama would give the US economy a "significant boost", says Federal Reserve boss Ben Bernanke.

In a speech in London, Mr Bernanke said that any plan must be accompanied by measures to stabilise and strengthen the financial system.

Mr Bernanke added that financial institutions deemed too big to fail had to accept closer regulation.

He said the central bank still had "powerful tools" to tackle the crisis.

"The incoming administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity," he said.

But he said that a modern economy could not grow unless its financial system was operating effectively.

The world is too interconnected for nations to go it alone in their economic, financial and regulatory policies
Ben Bernanke, Federal Reserve chairman

"It is unacceptable that large firms that government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period."

"The existence of too-big-to-fail firms violates the presumption of a level playing field among financial institutions," he added.

Mr Bernanke's speech came as the US trade deficit dropped to its lowest level in more than five years in November, as the economic slowdown led to lower demand for imports.

The trade deficit shrank 28.7% from October to $40.4bn (27.7bn), the Commerce Department said.

Alternative approach

BBC economics correspondent Andrew Walker said the most striking part of Mr Bernanke's speech was the suggestion of a return to the original idea of using the bail-out programme to buy troubled assets.

"This approach was sidelined in favour of making capital injections," our correspondent said.

Mr Bernanke said that the Treasury might buy troubled assets, or give guarantees that it would take on some of the prospective losses in exchange for warrants or other compensation.

Another approach would be to set up and fund banks to buy assets from financial institutions.

International regulation

Mr Bernanke also signalled that the US need to consider the long-term regulatory changes needed to make sure such a crisis did not reoccur.

"We do not have the luxury of postponing work on longer-term issues," he said.

He said that a key issue was strengthening the capacity of both the private sector and regulators to detect and manage risk.

And he signalled that the US would be far more amenable to seeking international regulation than in the past.

"The world is too interconnected for nations to go it alone in their economic, financial and regulatory policies," he said.

"International co-operation is thus essential if we are to address the crisis successfully and provide the basis for a healthy, sustained recovery," he added.

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