Fed Chief backs Obama’s stimulus package

Washington, January 14: Federal Reserve chairman, Ben Bernanke, publicly appreciated the efforts being made by the President-elect Barack Obama to bail out the economy from the quagmire it finds itself in.

While he was optimistic that the colossal stimulus package rolled out by the president will be of enormous help, he suggested that more measures should be undertaken to enable the economy come back on track.

Bernanke said, "In my view ... fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."

Among other suggestions, Bernanke recommended the government should infuse liquidity into the system. He urged the government to take radical steps to curb more home foreclosures.

In a speech to the London School of Economics, Bernanke said, "With the worsening of the economy's growth prospects, continued credit losses and asset markdowns may maintain for a time the pressure on the capital and balance-sheet capacities of financial institutions."

Another critical task on hand is to clean the balance sheets of banks. Bernanke was of the opinion that a 'good bank', 'bad bank' kind of a structure should be created wherein the toxic assets are offloaded to the latter category. The concept of setting up "bad banks" can be dated back to the 1990’s when the Swiss National Bank rescued UBS using a similar modus operandi.

He opined, "Yet another approach would be to set up and capitalize so-called 'bad banks,' which would purchase assets from financial institutions in exchange for cash and equity in the bad bank."

Bernanke averred that the Fed still has weapons in its armory to fight the financial crisis. He admitted that the interest rates, which are already nearing zero cannot be reduced "meaningfully further." He expected the inflation to be moderate in the near future.

The Fed chief’s all-embracing observations come a few days ahead of the change of guard at the White House. An optimistic Bernanke said, "As we look forward, there is a lot of uncertainty, but I am hopeful that later in 2009 -- depending on factors, particularly including the financial and credit markets -- we should begin to see some stabilization in the economy ... a stop to the bleeding, in a sense."