The chairman of the Federal Reserve, Ben Bernanke, described the nation's economy Wednesday as one that was barely limping along and could buckle if financial institutions did not get a $700 billion crutch from the government.
In his most detailed description of the economy since the Fed and the Treasury Department began calling last week for a broad bailout for the financial system, Bernanke said Main Street was already beginning to reel from the crisis on Wall Street.
Testifying before the Joint Economic Committee of Congress, Bernanke said home mortgages and car loans had become harder to get, commercial credit was becoming scarce for many businesses and consumer spending had already declined.
“Economic activity appears to have decelerated broadly,” the Fed chairman told the lawmakers. He then ticked off a list of depressing indicators.
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Consumer spending, adjusted for inflation, declined in both June and July and probably in August as well. The country lost 100,000 jobs in August and has lost 770,000 since November. Real after-tax income, adjusted for inflation, has fallen this year.
Bernanke stopped short of saying the economy had already fallen into a recession, as some private economists have said.
But he said that the combination of weakening household income, tougher credit conditions and declining wealth as a result of lower housing and stock prices had “begun to show through more clearly to consumer spending.”
The bottom line, he said, was that economic growth was likely to be “appreciably below” normal for the second half of this year – and that seemed to be a best-case situation that assumed financial markets returned to something closer to normal.
“This is the most significant financial crisis of the postwar period,” Bernanke said in response to a question. “I see the financial markets as already quite fragile. The credit markets aren't working. Corporations aren't able to finance themselves through commercial paper. Even if the situation stayed as it did today, that would be a significant drag on the economy.”
The Fed chairman delivered his somber assessment as the White House and Treasury Department pulled out the stops to reach a deal with Congress on their $700 billion rescue plan.
Bernanke offered little guidance about whether the Federal Reserve was likely to reduce interest rates again.