U.S. Moves Toward Stimulus as Bernanke, Bush Shift

By Ryan J. Donmoyer and Scott Lanman

Oct. 21 (Bloomberg) -- Lawmakers and officials moved toward forging a second fiscal stimulus bill after Federal Reserve Chairman Ben S. Bernanke endorsed the idea and the Bush administration dropped its opposition.

Bernanke warned legislators yesterday the credit crunch is ``hitting home,'' with Americans unable to get auto loans and companies denied cash, and recommended measures to help borrowers. White House Press Secretary Dana Perino said President George W. Bush was ``open to the idea'' of a new stimulus.

Momentum for fresh measures built after an earlier stimulus package failed to prevent a jump in the unemployment rate to a six-year high and the longest slump in retail sales since at least 1992.

Bernanke ``had to do what he did'' in supporting a further federal stimulus measure, said Lyle Gramley, a former Fed governor who is now senior economic adviser at Stanford Group Co. in Washington. ``If he went up there and said, `Well, I'm indifferent to a stimulus package, I'm opposed to it,' he would be sending the wrong signal.''

House Budget Committee Chairman John Spratt said a new push would be patterned after earlier proposals made by House Speaker Nancy Pelosi that extend jobless benefits, fund infrastructure projects such as road and bridge construction, and help cash- strapped state and local governments.

`Protracted Slowdown'

Bernanke told the Budget Committee yesterday that the danger of a ``protracted slowdown'' and a ``weak'' outlook for the U.S. economy into next year convinced him to support a new round of economic stimulus. A similar endorsement by Bernanke earlier this year helped clear the way for a $168 billion measure enacted in February.

``The big development is that Bernanke came and said, in Fed-speak, `You'd be wise to consider this,''' Spratt, a South Carolina Democrat, told reporters after the hearing. ``The momentum increased meaningfully because of Bernanke's endorsement.''

Spratt said the package may have to be structured in a way that increases deficits in the short term to avoid a longer-term economic slump that would have bigger budget effects in the long run.

The Bush administration is ``open to the idea'' of another economic stimulus package, though approval would depend on details drafted by Congress, Perino said. Proposals ``put forward so far'' by Democratic leaders in Congress ``were elements of a package we did not think would actually stimulate the economy, so we would want to take a look at anything very carefully,'' Perino said.

Paulson Plan

Separately, U.S. Treasury Secretary Henry Paulson said yesterday the government has set aside enough money to buy stakes in every financial company that qualifies for the crisis program aimed at halting the credit freeze. The New York Times and Wall Street Journal reported the government may use the aid to foster bank mergers, citing unnamed officials.

Barack Obama, the Democratic presidential candidate, last week urged Congress to act ``as soon as possible'' before the Bush administration leaves office on Jan. 20 to pass a stimulus measure. If Congress and the president didn't act ``it will be one of the first things I do as president of the United States,'' Obama said in an Oct. 13 speech in Toledo, Ohio.

Pelosi yesterday cited Bernanke's testimony to buttress her case for a new package. He ``made it clear that a new economic recovery package is critical to boost our weakening economy,'' Pelosi said in a statement.

Ohio Republican Representative John Boehner, the House minority leader, said the Democrats' proposals amounted to ``hundreds of billions in new government spending masquerading as `economic stimulus.'''

`Pro-Growth Policies'

``House Republicans agree with Chairman Bernanke that action to strengthen our economy is needed, and it should come in the form of pro-growth policies that create new jobs, lower energy costs and protect taxpayers,'' Boehner said.

Bernanke told lawmakers they ``should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers'' saying such measures ``might be particularly effective at promoting economic growth and job creation.''

In a further break from his message three years ago that he would refrain from making recommendations to Congress on fiscal matters, Bernanke offered to help Congress craft specific tax measures to aid credit. That blurs one distinction he had made from his predecessor, Alan Greenspan, who was widely interpreted in 2001 congressional testimony to have endorsed Bush's proposal to cut taxes by $1.6 trillion over 10 years.

Confirmation Hearing

Bernanke told lawmakers in his Senate confirmation hearing in November 2005: ``What I would like to do is refrain from making recommendations on specific matters of taxes and spending, or recommendations on specific measures.''

``Bernanke is so afraid of depression that it trips all other considerations,'' Robert Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors Inc. in Vineland, New Jersey, who used to work at the Atlanta Fed, said yesterday.

In the hallways outside the Budget Committee hearing room in the Cannon office building, rank-and-file lawmakers split along party lines.

Wisconsin Representative Paul Ryan, the top Republican on the panel, said he didn't think Bernanke's endorsement would bolster the Democratic agenda.

``Throwing more money out the door may help for a quarter, but it won't help to create jobs,'' Ryan said.

Democrat Lloyd Doggett of Texas called Bernanke ``a very reluctant endorser'' but said the Fed chairman's comments were ``notable'' because of the role he's played in managing the government's day-to-day response to the credit crunch.

Senate Resistance

He said Bernanke's comments, coupled with the election results, may change the outcome for the Democrats' proposal in the Senate, where the proposal has been met with resistance by Republicans who can easily block legislation.

Senate Majority Leader Harry Reid, a Nevada Democrat, said Bernanke might make a difference.

``I hope his testimony will convince President Bush and congressional Republicans that it is time to stand up for hard- working Americans who continue to struggle throughout the nation, not just bankers on Wall Street,'' Reid said in a statement.

California Representative Xavier Becerra, a Democrat who also sits on the tax-writing House Ways and Means Committee, said Democrats ought to be willing to negotiate with Republicans who want to include tax-reducing measures.

``We have to make room for the discussion,'' he said. ``Everything should be on the table. We won't put the `Mission Accomplished' sign up until everyone is back to work and their 401(k)s are doing well.''

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net.