Bernanke: Economy Is 'Hamstrung'

The government has the tools to fix problems in the credit markets, but the economy's recovery could take a while, according to Fed Chairman Ben Bernanke, in a speech to the Economic Club of New York.

In a frank discussion of the problems in the financial sector and the government's response, Bernanke seemed to think the government fixes around the globe will work.

The unwinding of these developments, including a sharp deleveraging and a headlong retreat from credit risk, led to highly strained conditions in financial markets and a tightening of credit that has hamstrung economic growth.

Before Bernanke's speech, the Dow was already down more than 350 points on bad economic news, including some dismal retail sales reports, and bounced slightly higher as the Fed chairman outlined but didn't name an economy likely in recession. Even if stability returns to credit markets, as the Fed hopes, "broader economic recovery will not happen right away." The economy was slowing before the crisis. Housing is still the primary source of weakness in the economy. "Marked slowdowns" are occurring in consumer spending, business investment, and the labor market. Exports, a former source of strength for the United States, "very probably will slow as well" as the global economy slows. The upside, however, will be cooler inflation led by lower energy and commodity prices, which could mean more rate cuts to come.

Janet Yellen, the San Francisco Federal Reserve Bank president, was less coy earlier in the day, saying the "U.S. economy appears to be in a recession."

Some highlights:

On the government's response to the crisis:

Generally, during past crises, broad-based government engagement came late, usually at a point at which most financial institutions were insolvent or nearly so. Waiting too long to respond has usually led to much greater direct costs of the intervention itself and, more importantly, magnified the painful effects of financial turmoil on households and businesses. That is not the situation we face today.

On why taxpayers won't foot the bill:

I would like to stress once again that the taxpayers' interests were very much in our minds and those of the Congress when these programs were designed. The costs of the FDIC guarantee are expected to be covered by fees and assessments on the banking system, not by the taxpayer. In the case of the TARP program, the funds allocated are not simple expenditures, but rather acquisitions of assets or equity positions, which the treasury will be able to sell or redeem down the road. Indeed, it is possible that taxpayers could turn a profit from the program, although, given the great uncertainties, no assurances can be provided.

In the Q&A following the response, Bernanke took questions on some historical comparisons. On why we won't have another depression: This turmoil is "not remotely like the '30s" today because the Fed's actions have been both rapid and huge in scope. "Moving quickly was important," he said.