–But Still Concerned About ‘Long Spells of Unemployment’
–Economy Seems to Have Stabilized But Not Out of the Woods Yet
–Renews Call for Tough New Regulation on Fin System, Too-Big-To-Fail

By Heather Scott

WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Wednesday
expressed optimism that the economy is on track to recover and slowly
reduce the unemployment rate, though he cautioned that there remain
areas of concern.

Bernanke also repeated his call for tough new regulation on
financial institutions that curb excessive risk taking, and eliminate
the possibility the government will again be called on to rescue a large
firm whose failure would threaten the entire economy.

“Fortunately, today the financial crisis looks to be mostly behind
us, and the economy seems to have stabilized and is beginning to grow
again,” he said in a speech prepared for delivery to the Dallas Regional
Chamber in Dallas.

“But we are far from being out of the woods,” Bernanke cautioned,
noting that “although much of the financial system is functioning more
or less normally, bank lending remains very weak, threatening the
ability of small businesses to finance expansion and new hiring.”

In addition, the housing market has yet to see “evidence of a
sustained recovery” and mortgage delinquencies and foreclosures
continued to increase, while commercial real estate “remains troubled,”
he said.

While unemployment has “edged off its recent peak,” he said “hiring
remains very week.”

Bernanke said he was especially concerned by the data showing “More
than 40 percent of the unemployed have been out of work six months or
longer, nearly double the share of a year ago.”

Even with those dire cautions, the Fed chief said “my best guess is
that economic growth, supported by the Federal Reserve’s stimulative
monetary policy, will be sufficient to slowly reduce the unemployment
rate over the coming year.

“If economic conditions improve, as I expect, we should see
increased optimism among consumers and greater willingness on the part
of banks to lend, which in turn should aid the recovery.”

At the same time, in the near term, “inflation appears to be well
controlled” and inflation expectations “appear stable,” he said.

In the longer term, Bernanke said the U.S. government must make the
hard choices to address demographic and fiscal challenges entailed in
Medicare and Social Security.

“Today the economy continues to operate well below its potential,
which implies that a sharp near-term reduction in our fiscal deficit is
probably neither practical nor advisable. However, nothing prevents us
from beginning now to develop a credible plan for meeting our long-run
fiscal challenges,” he said.

“Indeed, a credible plan that demonstrated a commitment to
achieving long-run fiscal sustainability could lead to lower interest
rates and more rapid growth in the near term.”

Bernanke repeated his support for tougher regulations on the
financial sector and tools to address the too-big-to-fail dilemma, “so
that we will never again face the unpalatable choice between bailouts
and a disorderly bankruptcy that threatens to bring down our financial
system.”

He said “the new regime should permit regulators to close a failing
firm and impose losses on shareholders and creditors; indeed, I would
argue that no financial instrument counted as regulatory capital should
be allowed to receive any protection from losses.”

But he said even as the Fed has improved and strengthened it’s
oversight is important that authorities do not inadvertently impede
renewed lending.

“If bankers become overly conservative in response to past lending
mistakes — or if examiners force such behavior — it will hurt bankers
own long-term interests and the economy in general,” Bernanke said.

** Market News International Washington Bureau: 202-371-2121 **

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