Page last updated at 17:20 GMT, Tuesday, 3 March 2009

Fed's Bernanke fears stagnation

Federal Reserve Board Chairman Ben Bernanke
Mr Bernanke says steps must be taken even if public debt rises

Federal Reserve chairman Ben Bernanke has warned of stagnation if the US authorities do not move "aggressively" to stimulate the economy.

He told the Senate Budget Committee that stabilising financial markets would be crucial for economic recovery.

Wall Street reacted negatively to Mr Bernanke's comments as shares fell.

Also on Tuesday, the Treasury and the Fed launched a programme aimed at generating up to $1tn (712bn) in new lending to consumers and businesses.

Under the program, called the Term Asset-Backed Securities Loan Facility (TALF), the Fed will lend up to $200bn to boost consumer lending for cars, credit cards, education and other things.

"The TALF is designed to catalyse the securitisation markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities," the Fed and Treasury Department said in a joint statement.

"The TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy."

'Moving aggressively'

The Fed will lend up to $200bn to institutions
The aim is to encourage institutions to increase lending to consumers and small businesses
They will be able to use new or recent debts, including car loans, credit card loans, student loans and government-guaranteed small business loans, as collateral
The Fed hopes the programme can potentially generate up to $1tn of new lending

Mr Bernanke told the Senate that the US government had made progress on the financial front since last autumn, but more needs to be done.

"We are better off moving aggressively today to solve our economic problems," he said.

"The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment and incomes for an extended period."

He urged the government to implement the necessary measures even if they caused a surge in public debt.

He also said that President Barack Obama's $787bn stimulus package of increased spending and tax cuts should help revive the economy, but its success is subject to "considerable uncertainty, reflecting both the state of economic knowledge and the unusual economic circumstances that we face".

Cary Leahey, an economist at Decision Economics in New York, said: "[Mr] Bernanke does not appear to be breaking any new ground.

"He spoke twice to Congress last week when he was quite pessimistic about the outlook this year and said recovery was almost entirely dependent on an adequate thawing out of the credit markets."

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