What Bernanke Didn't Say


In his first congressional appearance since intervening to prop up Bear Stearns, the Fed chief refused to call it a bailout—nor would he say there's a recession

Two words are hard to drag out of Ben Bernanke's mouth: recession and bailout. The Federal Reserve chairman predicted on Apr. 2 in prepared testimony to the congressional Joint Economic Committee that the economy "will not grow much, if at all, over the first half of 2008 and could even contract slightly." What he didn't say is that the U.S. was in a recession.

As for the Fed's financing to help JPMorgan Chase's takeover of Bear Stearns, Bernanke said "Sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence." But he didn't call it a bailout.

Bernanke faced tough questioning from senators and representatives in his first appearance before Congress since the Fed arranged the emergency weekend agreement by JPMorgan Chase (JPM) to take over Bear Stearns (BSC) on Mar. 16. The Federal Reserve supplied $29 billion to the deal in exchange for $30 billion worth of hard-to-sell assets owned by Bear Stearns, such as mortgage-backed securities.

In response to a question from the committee chairman, Senator Charles Schumer (D-N.Y.), Bernanke said, "A recession is possible. But a recession is a technical term defined by the National Bureau of Economic Research depending on data which will be available quite a while from now, so I'm not yet ready to say whether or not the U.S. economy will face such a situation."

Most of the questions concerned the Bear deal, not the economy, which many economists believe has already entered a recession. Several committee members asked, in effect, why the Fed appeared to be bailing out Wall Street but not Main Street.

An Extraordinary Action

Bernanke had three answers: First, he said, "A default by Bear Stearns could have been severe and extremely difficult to contain." Second, he said, the Fed expects to get all of its $29 billion back. Third, he agreed that action to help homeowners is essential, but that's a job for Congress, not the Fed.

There were a few flashes of drama. One came in response to a question by Senator Sam Brownback (R-Kan.) about why Bernanke intervened to stop Bear from failing. Brownback asked whether other failing firms might get similar treatment. Bernanke said he "thought long and hard" before intervening, and called it an extraordinary action. He said he hoped he would never have to do it again.

Schumer peppered Bernanke with questions about the Bear bailout and then juxtaposed that with what he believed was a lack of help to 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. "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."

Market Reaction Mixed

Later in the hearing, Senator Edward Kennedy (D-Mass.) raised his voice, repeatedly asking Bernanke to give his views on fiscal measures that could be taken by Congress and the Bush Administration. Bernanke declined to do so.

Market reaction to Bernanke's testimony was mixed. Stocks initially dipped, then rose slightly. Economists at Bear Stearns noted Bernanke "downplayed risks [of] inflation," which they interpreted as "leaving the door open to a further rate cut on Apr. 30." They speculated that it would be only a quarter-percentage-point cut, however.

Bernanke said he expects more economic growth in the second half of this year and into 2009, 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 aggressive rate reductions. "Much necessary economic and financial adjustment has already taken place," he said, and monetary and fiscal policies are in place "that should support a return to growth in the second half of this year and next year."

Coy is BusinessWeek's economics editor.

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