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Federal Reserve Chairman Ben Bernanke said Wednesday that the worsening financial crisis could prove a major weight on U.S. business growth and pledged to "act as needed" to brace the wobbly economy.
  

    Bernanke and his Fed associates are fighting the biggest
financial debacle since the Great Depression. On Wednesday, the Fed
chief faced a second straight day of tough questioning on Capitol
Hill about the Bush administration's proposed $700 billion bailout
plan.


      Lawmakers have voiced skepticism about the plan aimed at shoring
up troubled financial institutions and markets.


      Bernanke has been trying to reassure the country that the Fed
will do what it can to provide relief. Some analysts think interest
rates might be lowered again soon.


      The Fed chief appeared much more concerned about the stumbling
economy right now, than about the prospects of inflation getting
out of control. The slowing economy should cause inflation to
moderate later this year and next, he said.


      In testimony to Congress' Joint Economic Committee, Bernanke
repeated his warning of dire economic consequences if the bailout
isn't enacted and if credit woes persist. Neither businesses nor
consumers would be able to borrow money, he said, adding that such
a scenario could result in the world's largest economy grinding to
a virtual halt.


      "The intensification of financial stress in recent weeks, which
will make lenders still more cautious about extending credit to
households and business, could prove a significant drag on
growth," Bernanke said. "The downside risks to the outlook thus
remain a significant concern."


      All told, the economy is likely to turn in a subpar performance
in the second half of this year, Bernanke said. Consumers are
expected to rein in their spending as unemployment rises, paychecks
shrink and the energizing impact of the government's tax rebates
disappears. Slowdowns overseas aren't helping, Bernanke said,
noting that they'll cause American export growth to recede.


      "Economic activity appears to have decelerated broadly,"
Bernanke said.


      If credit stresses drag on, he warned lawmakers Tuesday, the
economy could actually shrink, more jobs will be lost and
foreclosures - already at record highs - will rise even more.


      Although Bernanke welcomed the recent retreat in oil prices from
the all-time high of $147.27 a barrel reached in mid July, he said
the central bank must remain vigilant because the situation can
turn quickly. Oil prices are up about $15 in the past week. Such
fluctuations in oil prices in the past few days illustrate the
difficulty of predicting the future course of prices, Bernanke
said.


      Last week, the Fed decided to hold its key interest rate steady
at 2 percent for the third straight meeting. However, it struck a
more bearish tone on the economy, hinting that rates could go lower
if conditions seriously deteriorate. Earlier this year, the Fed had
halted its most aggressive rate-cutting campaign in decades out of
fear that the low rates were aggravating inflation. Financial
turmoil, however, has now overwhelmed those concerns.


      "Stabilization of our financial system is an essential
precondition for economic recovery," Bernanke told lawmakers on
Wednesday.


      To that end, the Fed chief urged Congress to act quickly on the
administration's bailout plan, which he said he doesn't believe
will worsen inflation.


      The administration's plan would allow the government to buy bad
mortgages and other rotten assets held by troubled banks and
financial institutions. Getting those debts off their books should
bolster those companies' balance sheets, making them more inclined
to lend and easing one of the biggest choke points in the credit
crisis. If the plan works, it should help lift a major weight off a
national economy already crumbling under the burden of instability.


      However, both Democrats and Republicans said that big changes
are needed in the bailout plan. And that presages a difficult road
ahead for the measure on Capitol Hill, with the election-year break
bearing down on lawmakers.


      A thorny issue is how to price the distressed assets the
government would buy.


      Bernanke said he thinks prices will probably be higher than
rock-bottom, or fire-sale, but added: "I am not advocating the
government intentionally over pay" for the assets.


      So far this year, a dozen federally insured banks and thrifts
have failed, compared with three last year. The country's largest
thrift, Washington Mutual Inc., is faltering.


      The U.S. has taken extraordinary measures in recent weeks to
prevent a financial calamity, which would have devastating
implications for the broader economy. It has, among other things,
taken control of mortgage giants Fannie Mae and Freddie Mac,
provided an $85 billion emergency loan to insurance colossus
American International Group Inc. and temporarily banned short
selling of hundreds of financial stocks.

Gallery

Federal Reserve Chairman Ben Bernanke said Wednesday that the worsening financial crisis could prove a major weight on U.S. business growth and pledged to "act as needed" to brace the wobbly economy.

Bernanke: Fed will 'act as needed' to help

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