TOPICS > Economy

Economy on Brink of Recession, Bernanke Warns

BY Admin  April 2, 2008 at 11:30 AM EST

Federal Reserve Chairman Ben Bernanke; AP photo

In testimony to Congress’ Joint Economic Committee, Bernanke’s largely bleak assessment is the clearest indicator yet that a string of troubles in the housing, credit and financial sectors has had a deep impact on the country’s economic health.

“Recession is possible, but recession is a technical term … I’m not ready to say whether or not the U.S. economy will face such a situation,” Bernanke told lawmakers, according to Reuters.

“It now appears likely that gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly,” Bernanke said. GDP measures the value of all goods and services produced within the United States. Under one definition, six straight months of declining GDP, would constitute a recession, according to an Associated Press analysis.

“Although our recent actions appear to have helped stabilize the situation somewhat, financial markets remain under considerable stress,” Bernanke said.

Still, the central bank chief said that he expects more economic growth in the second half of this year and beyond, helped by the government’s $168 billion stimulus package of tax rebates for people and tax breaks for businesses as well as the Fed’s recent reductions to a key interest rate.

The Federal Reserve has aggressively cut a key interest rate, now at 2.25 percent, to encourage buying and investing by individuals and businesses.

“Clearly, the U.S. economy is going through a very difficult period,” he told lawmakers.

Bernanke also addressed the Fed’s decision to back a $29 billion lifeline as part of JP Morgan’s deal to take over the troubled Bear Stearns, the nation’s fifth largest investment house

Bernanke defended the move.

“With finanical 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,” he said. “The damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain.”

Committee Chairman Sen. Charles Schumer, D-N.Y., peppered Bernanke with questions about the Fed’s decision to aid Bears Stearns and compared that with proposals to assist millions of people at risk of losing their homes.

“I hope that you will use your position to jawbone this administration to get behind the housing relief effort before Congress.” Schumer said, according to the AP. “Addressing the housing crisis head-on will do as much to instill confidence in the markets as lowering interest rates or bolstering regulatory oversight of wayward mortgage lenders and financial institutions. We need to do all of it.”