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Fed Favors Temporary Stimulus Package

Federal Reserve Chairman Bernanke said Thursday that the U.S. needs to enact a targeted and timely stimulus package that helps those who are struggling and that it should do it sooner rather than later.

Bernanke said he is in support of a $100 billion measure to stimulate the U.S. economy and that such a plan should be implemented quickly.

"To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so," Bernanke told the House Budget Committee.


He said that waiting too long could be destabilizing if it comes at a time when growth is already improving.

Lawmakers lectured the Fed chief and fired questions at him regarding which moves to take to spring the economy from its slump and evade recession.

He declined to lay out any specific requirements but said the economic effects of a fiscal stimulus package totaling around $100 billion could be "significant" and not "window dressing."

He did emphasize that any plans should also be temporary in order to prevent long-term fiscal challenges.

"Any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government's structural budget deficit," he said.


The U.S. is poised to encounter overwhelming long-run budget challenges stemming from an aging population and rising health care costs, he said.

Bernanke has said previously that some kind of fiscal stimulus is needed and that the Fed "stands ready" to act.

He told the congressional committee Thursday that the hamstrung economy — which began slowing in the fourth quarter of 2007 — is likely to limp along throughout 2008 and into 2009, due largely to the sharp contraction of the housing market.

As the housing contraction wanes, the economy should pick up, the Fed chief said in response to Rep. John Spratt (D-S.C.), chairman of the Budget Committee, who asked for an overall diagnosis of the economy for the next 12 to 18 months.

"We are not forecasting recession, but slow growth," Bernanke said, noting rapid increases in oil and food prices.

But stock investors were not consoled, and sold off the market. Shares were down more than 170 points in midday trading.

The Democratic-led Congress has expressed its willingness to back a stimulus package as well, saying legislation could be crafted and on the president's desk in 30 days.

The economy continues to weaken under the weight of the slumping housing market and credit woes, largely trigged by subprime adjustable-rate mortgage loans. These loans were made to consumers with poor credit and designed to give more consumers an opportunity to be first-time homeowners. Adjustable-rate mortgages are introduced with a low interest rate that resets over time. Many consumers were not prepared for the reset and are currently delinquent or in default of their loans.

Consumers' inability to pay off their loans put banks and other financial operations in jeopardy and rocked financial markets worldwide.

Bernanke said that in the subprime adjustable-rate mortgage market there are about 5 million mortgages with a total principle value of about $1 trillion, and currently about 20 percent of those mortgages are delinquent.

"Our expectation is that delinquencies will go higher and that there will be ongoing losses in the subprime area," he said.

He told lawmakers that if all 5 million mortgages go into foreclosure — stressing that that was an exaggeration — and say only 50 percent of the value were recovered, it would mean some $100 billion in losses.

More downbeat economic news regarding the housing sector was released before Bernanke's testimony: New-home building plunged last year by 24.8 percent. The Commerce Department said that is the biggest drop in 27 years.

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