April 2nd, 2008 15:53 EST
Fed Chief concedes recession is possible
By Barry Wood
The head of the U.S. central bank, Ben Bernanke, told a congressional committee the U.S. economy could face a mild recession, but it should recover later this year.
Federal Reserve Chairman Ben Bernanke said the economy is going through a very difficult period. While conceding that a recession is possible, he said it is too early to say the economy is in recession, usually defined as six months of negative growth.
Opposition Democrats, who control both houses of Congress, wanted to know why the Federal Reserve last month stepped in to prevent the collapse of a Wall Street investment house, but is not doing the same to assist distressed home buyers having trouble making their mortgage payments.
"How can one justify going in with government back-up for Bear Stearns, or any large financial institution, and not for the millions of homeowners," asked New York Senator Charles Schumer, who is the chairman of the Joint Economic Committee.
Bernanke replied that the Federal Reserve did not bail out Bear Stearns, the large investment bank and brokerage rescued from near bankruptcy in mid-March.
"Bear Stearns shareholders took a very significant loss," he said. "An 85-year-old company lost its independence and became acquired by another firm [JP Morgan Chase bank]. Many Bear Stearns employees, as you know, are concerned about their jobs. I do not think any company is interested in repeating the experience of Bear Stearns."
Bernanke said that the Federal Reserve's repeated reductions in short-term interest rates during the past year will help distressed home buyers.
"Our interest rate cuts and our liquidity measures, in particular, have significantly reduced the interest rate reset problem faced by many mortgage holders," he said. "And we have extensive efforts on the ground to work with community groups to help reduce delinquencies and problems of foreclosure."
After five years of steady growth, the U.S. economy has slowed dramatically, in part because the collapse of a speculative bubble in housing. In many markets, home prices that had nearly doubled from 2002 to 2005 have subsequently declined by up to 30 percent.
The troubles in the U.S. housing sector spilled over into global markets last August, causing a severe contraction in credit and billions of dollars in bank losses.