Bernanke says economy could contract ’slightly’

Filed under: Economic data, Bear Stearns Cos (BSC), Housing, Federal Reserve, Recession

Federal Reserve Chairman Ben Bernanke isn’t promising anyone a rose garden at least until next year.

In testimony before Congress today, Bernanke paints a pretty grim picture and even goes so far as to say that, “Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly.”

Bernanke expects economic activity to improve in the second half of the year because of the stimulus package, and growth to improve in 2009 as housing begins an anemic rebound. He quickly added that the uncertainty “attending this forecast is quite high and the risks remain to the downside.”

Not surprisingly, Bernanke also defended the bailout of Bear Stearns Cos. (NYSE: BSC), arguing that allowing the Wall Street firm to fail would have had effects that would have been “severe and extremely difficult to contain.” He also mentioned that he remained optimistic about the economy’s long-term prospects even as it goes through a difficult period.

Interestingly, in the question-and-answer session, Bernanke said the Fed was urging firms to get more capital and that it had staff at the investment banks to monitor them. He argued that there was a “false dichotomy” to ask why homeowners aren’t getting the same deal as Bear Stearns.

“I certainly hope and don’t expect a repeat of this episode,” he told Sen. Chuck Schumer (D-NY), denying that Bear was bailed out. “We did not have an early warning on the most recent episode.”

Bernanke rightly called for Congress to take action to help homeowners hurt by the housing downturn. The problem that many politicians have is that they have to explain to their constituents why a bunch of Wall Street fat cats got government help and millions of homeowners in danger of losing their houses are out of luck.

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This entry was posted on Sunday, April 6th, 2008 at 12:07 am and is filed under Real Estate and Housing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.