WASHINGTON  – Federal Reserve Chairman Ben Bernanke told Congress Tuesday that the economy should pull out of a recession and start growing again later this year.

But in testimony to Congress’ Joint Economic Committee, Bernanke warned that even after a recovery gets under way, economic activity is likely to be subpar. That means businesses will stay cautious about hiring, driving up the nation’s unemployment rate and causing “further sizable job losses” in the coming months, he said.

The recession, which started in December 2007, already has snatched a net total of 5.1 million jobs.

The unemployment rate “could remain high for a time, even after economic growth resumes,” Bernanke said.

Even with all the cautionary notes, the Fed chief offered a far less dour assessment of the economy.

“We continue to expect economic activity to bottom out, then to turn up later this year,” he told lawmakers.

Recent data suggest the recession may be loosening its firm grip on the country, Bernanke said.

“The pace of contraction may be slowing,” he said. It was similar to an observation the Fed made last week in deciding not to take any additional steps to shore up the economy.

The housing market, which has been in a slump for three years, has shown some signs of bottoming, he said. Consumer spending, which collapsed in the second half of last year, came back to life
in the first quarter.

In the months ahead, consumer spending should be lifted by tax cuts contained in President Barack Obama’s larger $787 billion stimulus package. Still, rising unemployment, sinking home values and cracked nest eggs will still weigh on consumers willingness to spend freely, Bernanke said.

In the latest sign the downturn could be easing, activity in the services sector contracted at a slower pace in April, the Institute for Supply Management reported Tuesday. Its service sector index came in at 43.7 in April, up from 40.8 in March. Any reading below 50 indicates the service sector, where most Americans work, is contracting.

Meanwhile, business investment remains “extremely weak,” and conditions in the commercial real estate market are “poor,” the Fed chief said.

Still, Bernanke said he was hopeful that production would pick up later this year to replenish stockpiles of goods that have been slashed. And there’s been tentative signs that the declines in other countries’ economic activity may be moderating, which could help sales of U.S. exports. They have been falling sharply, a key factor behind the drag on U.S. manufacturing, he said.

Private analysts are predicting the economy won’t shrink nearly as much as it had been – anywhere from a pace of 1 to 3 percent – in the current quarter. As Obama’s economic stimulus package of tax cuts and increased government spending takes hold, analysts think the economy could start growing again in the third or forth quarter of this year.

The economy’s rate of decline topped 6 percent in both the final three months of 2008 and in the first quarter of this year. It marked the worst six-month performance since the late 1950s.

Economists predict the jobless rate will jump to 8.9 percent in April from 8.5 percent in March as employers slash hundreds of thousands more jobs. The government releases that report on Friday. Unemployment is expected to hit 10 percent by the end of this year.

As Bernanke has said in the past, the Fed’s forecast for a recovery hinges on the government’s ability to gradually repair the financial system. “A relapse … would be a significant drag on economic activity and could cause the incipient recovery to stall,” he warned.

On the financial front, Bernanke said there have been signs of improvements in easing some credit stresses. However, financial markets remain under considerable strain.

Bernanke didn’t provide details about how 19 large banks fared on “stress tests.” Results, to be released Thursday, should shed light on which banks may need government support if the recession were to worsen.

He did say that after the results are released, banks will be required to develop “comprehensive capital plans for establishing the required buffers” to protect against future losses. They will have six months to execute those plans or get help from the government.

Bernanke said there are “significant opportunities for capital raising outside government programs,” and that many banks should be able to do so by selling assets or taking other steps.

The International Monetary Fund estimated that $275 billion more in capital would be needed to cushion against further losses at U.S. banks. While refusing to provide any numbers, Bernanke said he thought the IMF’s figure overestimated any additional capital needs.

Responding to lawmakers’ concerns about secrecy in its lending and bailout programs, Bernanke said the Fed will start providing information on the number of borrowers under each plan, details of credit extended and information on the collateral put up for the loans.

But Bernanke didn’t say the Fed would release the identity of borrowers, something lawmakers have pushed for.

WASHINGTON  – Federal Reserve Chairman Ben Bernanke said Tuesday there’s been “tentative signs” that the recession may be easing. But he also warned that any hope for a lasting recovery hinges on the government’s success in stabilizing shaky financial markets and getting credit to flow more freely again.

Specifically, the Fed chief mentioned improvements in recent data on home and auto sales, home building and consumer spending as flickering signs of encouragement.

“Recently we have seen tentative signs that the sharp decline in economic activity may be slowing,” Bernanke said in remarks prepared for students and faculty at Morehouse College in Atlanta.

“A leveling out of economic activity is the first step toward recovery. To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets,” he said.

But the Fed is “making progress on that front as well,” Bernanke said, and will keep working to ease financial and credit stresses so those markets operate normally.

To revive the economy, the Fed has cut a key bank lending rate to a record low of near zero and has rolled out a number of radical programs to spur lending to Americans, a key ingredient to turning around the economy.

On that front, the Fed recently plowed $1.2 trillion into the economy in an attempt to reduce interest rates for mortgages and other loans.

Many analysts believe the economy will continue to shrink in the April-June quarter but not nearly as much as it had been – perhaps at a rate of 2 to 2.5 percent.

The economy shrank at a 6.3 percent rate in the final three months of 2008, the worst showing in a quarter-century. Some economists say it fared about as poorly in the first three months of this year, while others expect a 4 to 5 percent rate of decline.

The government releases its initial estimate for first-quarter economic activity at the end of April.

WASHINGTON – Treasury Secretary Timothy Geithner asked Congress on Tuesday for broad new powers to regulate nonbank financial companies like troubled insurer American International Group whose collapse could jeopardize the economy.

“AIG highlights broad failures of our financial system,” Geithner told the House Financial Services Committee. “We must ensure that our country never faces this situation again.”

At the same time, Federal Reserve Chairman Ben Bernanke revealed that he had considered filing suit to keep AIG from paying millions in executive bonuses but that his legal advisers counseled him not to do so.

Geithner acknowledged that the current climate of anger, including the furor over those retention bonuses, will complicate any effort by the Obama administration to get more bailout money from Congress. “We recognize it will be extraordinarily difficult,” he said.

Geithner joined Bernanke in calling for greater governmental authority over complicated and troubled financial companies – power they likened to the authority wielded over banks by the Federal Deposit Insurance Corporation. That includes the power to seize control of institutions, take over their bad loans and other illiquid assets and sell good ones to competitors.

AIG is a globally interconnected colossus, with 74 million customers worldwide and operations in more than 130 countries. The government decided it was simply too big to let fail.

“Its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs,” Bernanke told the panel.

Geithner, Bernanke and New York Fed President William C. Dudley testified in a rare joint appearance before the panel. Their testimony came a day after the Fed unveiled a new bank rescue plan under which the government would take responsibility for up to $1 trillion in sour mortgage securities with the help of private investors.

That delighted Wall Street and the Dow industrials shot up nearly 500 points. On Tuesday, Wall Street gave back some of its gains. The Dow was down just over 30 points in midmorning trading.

Much of Tuesday’s discussion centered on ways to help the government better deal with future AIG-like companies whose failure could devastate the financial system and the drag down the economy.

“As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can,” Geithner said. “The administration proposes legislation to give the U.S. government the same basic set of tools for addressing financial distress at non-banks as it has in the bank context.”

Geithner made it clear he believes the treasury secretary should be granted unprecedented power, after consultation with Federal Reserve Board officials, to take control of a major financial institution and run it. The treasury chief is an official of the administration, unlike the FDIC, which is an independent regulatory agency.

The witnesses were asked if AIG would have been treated any differently, including the payment of $165 million in bonuses earlier this month, if such powers had existed last September, when the Fed began the government bailout of the insurer.

“Quite differently. It could have been taken into receivership or conservatorship. …The bonus issue would not have arisen,” Bernanke said.

He said that contracts providing for the bonuses could have been adjusted and “we could have taken haircuts” against some of AIG’s financial obligations to other companies.

AIG has become a symbol of reckless risk-taking on Wall Street. The House last week voted overwhelmingly to slap 90 percent taxes on the largest bonuses and similar, although not as punitive, legislation is before the Senate.The bonuses came even as AIG reported a stunning $62 billion loss, the biggest in U.S. corporate history.

The government has bailed out AIG four times, to the tune of more than $180 billion altogether.

New York Attorney General Andrew Cuomo said Monday that 15 employees who received some of the largest bonuses from AIG have agreed to return them in full, totaling about $50 million.

Bernanke said it was “highly inappropriate to pay substantial bonuses” to the employees. Bernanke said he asked that the payments be stopped but was told that they were mandated by contracts agreed to before the government seized control of AIG on September 16.

“I then asked that suit be filed to prevent the payments,” he said. Bernanke said that his legal staff counseled against this action on the grounds that Connecticut law provided for substantial punitive damages in the event any such suit failed. AIG’s financial products division has a base in Connecticut.

The AIG bonuses created a public relations headache for President Barack Obama at a time when he was trying to gin up public and political support for his economic policies, bank-rescue plan and overhaul of the nation’s regulatory structure.

Government bailouts of AIG, Citigroup Inc., Bank of America Corp. and others have put billions of taxpayers’ dollars at risk over the past year and have angered the American public.

WASHINGTON – Federal Reserve Chairman Ben Bernanke told Congress Tuesday that any hope for an economic recovery will hinge on the government’s ability to prop up shaky financial markets.

The effectiveness of a string of radical actions taken by the Fed, the Treasury Department and other agencies to stabilize markets “will be critical determinants of the timing and strength of the recovery,” Bernanke said in testimony to the Senate Budget Committee.

The Fed chief found himself on the hot seat when lawmakers voiced concerns about the government’s new $30 billion lifeline for ailing insurance giant American International Group. The latest plan, announced Monday, marked the government’s fourth effort to stabilize AIG.

Both Democratic and Republican lawmakers expressed skepticism over whether the action would work, said they were worried that more taxpayer money will be needed to rescue the company and demanded more accountability.

“I share your anger,” Bernanke said. The government didn’t really have a choice but to take the action because a collapse of AIG would have grave implications for the country’s already fragile economic and financial health, he added.

“We’re no better off,” huffed Sen. Jim Bunning, R-Ky. “The bottom line: the Fed and the Treasury will leave the door open for more bailouts in the future.”

President Barack Obama’s recently enacted $787 billion stimulus package of increased federal spending and tax cuts should help revive moribund consumer demand, boost factory production over the next two years and “mitigate the overall loss of employment and income that would otherwise occur,” Bernanke said.

However, the Fed chief warned that the timing and magnitude of the impact of the stimulus package is subject to “considerable uncertainty, reflecting both the state of economic knowledge and the unusual economic circumstances that we face.”

The recession, now in its second year, is inflicting more damage to the economy daily as layoffs mount and companies cut production.

The economy contracted at a staggering 6.2 percent in the final three months of 2008, the worst showing in a quarter-century, and the Fed has said it will probably shrink during the first six months of this year. Recent economic barometers “show little sign of improvement,” Bernanke said.

Still, the Fed chief told lawmakers that the U.S. will be better off “moving aggressively” to solve economic problems because the alternative “could be a prolonged episode of economic stagnation.”

The nation’s unemployment rate in January jumped to 7.6 percent, the highest in more than 16 years. And the number of newly laid-off people signing up for unemployment benefits has risen since mid-January, “suggesting that labor market conditions may have worsened further in recent weeks,” Bernanke said.

The government will release February unemployment data on Friday and many economists are predicting the unemployment rate rose to 7.9 percent last month while employers cut nearly 650,000 jobs.

With jobs vanishing, nest eggs cracking and home values tanking, consumers have reined in their spending. That has forced companies to lay off workers, trim production and cut back in other ways. It’s a vicious circle of negative forces that feed on each other, deepening the recession.

In back-to-back appearances on Capitol Hill last week, Bernanke planted a seed of hope that the recession could end this year if the government was successful in turning around wobbly financial markets. But the Fed chief didn’t repeat that remark in Tuesday’s testimony.

Bernanke said the government has made some progress on the financial front since last fall, but he told lawmakers that “more needs to be done.”

The Obama administration has revamped a $700 billion financial bailout program aimed at strengthening banks, but has said additional money could be needed.

Obama’s first budget holds out the possibility of spending $250 billion more for additional financial industry rescue efforts.

“Whether further funds will be needed depends on the results of the current (stress tests) of banks, the evolution of the economy and other factors,” Bernanke said.

The price of such bold action will push the nation’s federal budget deficit to nearly $1.8 trillion this year, and above $1 trillion in 2010 and 2011, he said. Of the deficits, “I’m afraid they are unavoidable” to get the economy on a recovery path, Bernanke said.

Asked whether Obama’s economic assumptions in his budget are too rosy, Bernanke said although they are a little more optimistic than the Fed’s projections, “these things are hard to predict with precision.”

A mammoth stimulus package being crafted by  President-elect Barack Obama could give the economy a much-needed  lift, but other steps must be taken to bolster the wobbly financial  system and for any recovery to stick, Federal Reserve Chairman Ben  Bernanke said Tuesday. 

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TAMPA, Fla. – Democrat Barack Obama said Tuesday any plan to rescue Wall Street from its financial woes must ensure that taxpayers are reimbursed and corporate executives are not further enriched for bad behavior.
  
The Democratic presidential candidate also accused President Bush of taking a “my way or the highway” attitude on the proposed bailout.

Obama added that his proposed middle-class tax cuts remain “absolutely necessary” despite the economic turbulence. He said it would put money in the pockets of working families at a time when the economy may be sliding into recession.

Obama outlined several principles that he said should be included in the $700 billion bailout to ensure that troubled financial firms and their executives don’t take advantage of taxpayers.

Companies that take financial aid from the government must slash their executives’ salaries, he said. Taxpayers must be treated like investors who can share in any Wall Street recovery, perhaps with an ownership stake in the companies, and a new fee on financial services should be created to repay the government aid.

“This plan cannot be a welfare program for Wall Street executives,” he said at a news conference.

Decisions on how to spend that $700 billion cannot be left solely in the hands of the Treasury secretary, Obama added. An independent board should be chosen by Democrats and Republicans “to provide oversight and accountability at every step of the way.”
  
Earlier, in an interview on “Today,” Obama had said the huge expense of a Wall Street bailout might require a “phase in” of the programs he has promised, including tax cuts.

But speaking to reporters in Florida, where he will be preparing for Friday’s debate, Obama said he remains committed to addressing needs in health care, education and energy. “Tax cuts would be particularly important to strengthen an economy sliding into economic recession,” he said.