Bernanke Backs More Stimulus, Citing `Weak' Outlook

By Scott Lanman

Oct. 20 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke endorsed consideration of a fiscal stimulus package, citing the chance of a ``protracted slowdown'' and a ``weak'' outlook for the U.S. economy into next year

Lawmakers ``should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,'' Bernanke said in testimony to the House Budget Committee. ``Such actions might be particularly effective at promoting economic growth and job creation,'' he said, calling consideration of a stimulus ``appropriate.''

Bernanke's remarks differ with the Bush administration's position and may give momentum to legislation being proposed by House Democrats; in January Bernanke told the same panel a stimulus ``could be helpful'' and urged lawmakers to act ``quickly.'' The impact of that $168 billion measure faded by July, and economists anticipate the economy will contract in the current quarter.

The Bush administration has been cool to the prospect of another stimulus. Press Secretary Dana Perino, responding to reporters' questions Oct. 16, said that ``a lot of conversations about a second stimulus took place just last month'' with Congress, but ``we didn't think'' the proposals put forward ``would help bring money into the economy.''

House Speaker Nancy Pelosi has proposed a fiscal stimulus of as much as $150 billion to aid the economy after the credit crunch deepened in recent months and the impact of the first stimulus package wore off.

Wisconsin Representative Paul Ryan, the budget panel's ranking Republican, said in the hearing that the Democratic plan is ``bloated'' and may balloon the budget deficit to $1 trillion.

Giving `Validity'

Bernanke's support would lend the Democrats' plan both ``validity'' and bipartisan sheen that would make it easier to approve, Representative Scott Garrett, a New Jersey Republican on the committee, said before the testimony. Garrett said he intends to ask Bernanke why ``we didn't see more of a lasting positive result'' from the first stimulus.

The plan floated by Pelosi, a California Democrat, includes increased federal spending on unemployment benefits, food stamps, highway-construction projects and aid to cash-strapped state governments. No vote has been set.

``Any fiscal action inevitably involves tradeoffs'' that may ``burden future generations,'' Bernanke said. Yet ``with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate.''

Evidence of a recession increased last week, as confidence among Americans fell by the most on record and single-family housing starts hit a 26-year low. Industrial output fell 6 percent in the third quarter, the most since 1991, and a factory index for the Philadelphia region hit an 18-year low this month.

Below Potential

``The pace of economic activity is likely to be below that of its longer-run potential for several quarters,'' Bernanke said in today's testimony. ``The slowing in spending and activity spans most major sectors.''

The Fed lowered its benchmark interest rate a half point on Oct. 8 to 1.5 percent in an unprecedented coordinated action with other central banks. Traders see about a 46 percent chance of a half-point cut at or before the Federal Open Market Committee's Oct. 28-29 meeting, futures prices show. The contracts indicate 100 percent probability of a quarter-point move.

As the credit crisis intensified into a freeze in early September, the Fed took unprecedented actions: rescuing insurer American International Group Inc. with an $85 billion loan, later supplemented by $38 billion of additional credit; backing legislation to spend up to $700 billion on recapitalizing banks and buying distressed assets; and setting up a short-term funding backstop for U.S. companies through commercial-paper purchases.

Aiding Banks

U.S. regulators last week announced fresh efforts to jump- start lending. The Treasury committed $250 billion in taxpayer funds to private banks and the Federal Deposit Insurance Corp. extended its insurance to include new debt sold by banks.

``These measures were announced less than a week ago, and, although there have been some encouraging signs, it is too early to assess their full effects,'' Bernanke said.

Still, the actions ``should help rebuild confidence in the financial system,'' Bernanke said. While the rescue legislation was ``critical'' for helping to contain ``damage to the broader economy,'' stabilizing the financial system ``will not quickly eliminate the challenges still faced by the broader economy,'' he said.

Business spending may decline further in coming months, and homebuilding may keep contracting into 2009, Bernanke said. Lower commodity prices and the slowing economy ``should bring inflation down to levels consistent with price stability,'' he said.

Today's comments echo Bernanke's warning last week that the economy may be in for a prolonged period of sub-par growth. ``A broader economic recovery will not happen right away,'' and ``economic activity will fall short of potential for a time,'' he said in an Oct. 15 speech.

Treasury Secretary Henry Paulson is scheduled at 11:30 a.m. in Washington today to present further details on how banks may participate in the government's plan to inject capital into the financial system.

The House budget panel is chaired by Representative John Spratt, a South Carolina Democrat who represents Dillon County, where Bernanke grew up.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net