The Housing Chronicles Blog: Bernanke finally admits the obvious: a recession

Wednesday, April 2, 2008

Bernanke finally admits the obvious: a recession

Fed Chairman Ben Bernanke has finally dipped his toes into the waters of reality, admitting that real gross domestic product "could even contract slightly." He also discussed revealed his thoughts on managing inflation versus propping up the sicker parts of the economy, including rescuing Bear Stearns from an almost-certain wipe-out. From an L.A. Times story:

Federal Reserve Chairman Ben S. Bernanke warned this morning that threats to the economy are far from over, with unemployment on the rise, prices for food and fuel growing, and real incomes on the wane...

The Fed chairman said he considered inflation to be a secondary threat to the economy, citing a leveling off of commodities prices in the futures markets, especially for oil. And he said that he expects the economy to be on the rebound by the end of the year....

Bernanke also defended the Fed's decision last month to underwrite the buyout of troubled Wall Street brokerage Bear Stearns by JPMorgan Chase -- a decision that led the central bank for the first time in more than 70 years to make loans to non-banks.

"With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence," Bernanke explained. "Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."

So what about homeowners on trouble? That one was handled by committee chairman Chuck Schumer:

"The administration was all for government action in the case of Bear Stearns, but what about government action to help homeowners?" Schumer asked in opening remarks. "Yes, Bear Stearns was in trouble, but millions of homeowners are also in trouble. Yes, Bear Stearns needed government intervention, but what about government intervention for homeowners?"

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