Bernanke warns of possible U.S. recession

Striking a hopeful note, though, he said he expects economic growth to pick up in the second half of the year and into 2009, helped by the government’s $168 billion stimulus package of tax rebates for people and tax breaks for businesses as well as the Fed’s aggressive interest rate reductions.

“Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year,” Bernanke said.

On the hot seat, Bernanke was grilled by senators about the Fed’s moves to aid the once mighty Wall Street firm Bear Stearns, and about additional actions Congress and the White House should take to provide relief to struggling homeowners.

“I hope that you will use your position to jawbone this administration to get behind the housing relief effort before Congress,” said committee chairman Charles Schumer, D-N.Y. “Addressing the housing crisis head-on will do as much to instill confidence in the markets as lowering interest rates or bolstering regulatory oversight of wayward mortgage lenders and financial institutions. We need to do all of it.”

Sen. Robert Bennett, R-Utah, said people shouldn’t view the situation as Wall Street versus Main Street.

“My experience is that Wall Street and Main Street are inextricably linked,” he said. “We’ve reached the point in our financial system now where a community bank on Main Street has to have a correspondence with a major bank on Wall Street in order to keep things going, and that what happens in the banking system generally permeates down to the very lowest level.”

Bernanke urged Congress to take additional steps to bolster the housing market and to aid people in danger of losing their homes. But he refused to be pinned down on making specific recommendations in other areas, such as how to help struggling state governments hit by the crisis. That exasperated Sen. Edward Kennedy, D-Mass., who pleaded: “What are we going to tell the states? ...The states are in a critical situation.”

Besides lowering interest rates, the Fed has taken a series of extraordinary steps in recent weeks and months to prop up the nation’s financial system, which has been in a state of high jeopardy.

In a controversial move, the Fed backed a $29 billion lifeline as part of JP Morgan’s deal to take over the troubled Bear Stearns, the nation’s fifth largest investment house, which was on the brink of bankruptcy. Bear Stearns had invested heavily in risky mortgage-backed securities that eventually soured with the collapse of the housing market.

That brought criticism from Democrats and others who contend the Fed is bailing out Wall Street and putting billions of taxpayer dollars at potential risk.

Bernanke defended the move as necessary to avert a meltdown in the entire financial system. “The damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain,” he said. The Fed’s unprecedented involvement was meant as a one-time event. “It has never happened before, and I hope it never happens again,” he told lawmakers.

Although the taxpayers are on the hook for the $29 billion, Bernanke believed they wouldn’t suffer any losses. “I feel reasonably confident that we will be able to recover all of the principle and indeed some interest, and there is some chance of even upside beyond that.”

To also ease the credit crisis, the Fed — in the broadest use of its lending authority since the 1930s — agreed to temporarily let big investment firms obtain emergency financing.

Bernanke said the Fed “never lost a penny” in the past from various lending maneuvers.

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