Bernanke Relays Hard Truth To Congress

WASHINGTON -- For the first time, Federal Reserve Chairman Ben Bernanke acknowledged the U.S. could reel into recession from the powerful punches of housing, credit and financial crises. Yet, he was coy about the Fed's next move.

With home foreclosures swelling to record highs and job losses mounting, Bernanke on Wednesday offered Congress an unflinching -- and more pessimistic -- assessment of potential damage to the national economy.

"A recession is possible," said Bernanke, who is under immense political and public pressure to turn things around. "Our estimates are that we're slightly growing at the moment, but we think that there's a chance that for the first half as a whole there might be a slight contraction."

It's the closest Bernanke has come to suggesting that possibility, given a trio of crises -- housing, credit and financial -- that has pummeled the country.

"It now appears likely that gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly," Bernanke told lawmakers. GDP measures the value of all goods and services produced within the United States and is the best barometer of the United States's economic health. Under one rule, six straight months of declining GDP, would constitute a recession.

In a controversial move, the Fed backed a $29 billion lifeline as part of JP Morgan's deal to take over the troubled Bear Stearns, the nation's fifth largest investment house, which was on the brink of bankruptcy. Bear Stearns had invested heavily in risky mortgage-backed securities that eventually soured with the collapse of the housing market.

Bernanke defended the move. "With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence," he said. "We did not bail out Bear Stearns, an 85-year-old company lost its independence...The damage caused by a default Bear Stearns could have been severe and extremely difficult to contain."

In addition, the Fed -- in the broadest use of its credit authority since the 1930s -- agreed to temporarily let big investment firms obtain emergency financing from the Fed, a privilege that previously had been granted only to commercial banks.

Those actions have prompted criticism from Democrats and others who contend that the Fed is bailing out Wall Street and putting billions of taxpayers' dollars at potential risk. Fed officials and the Bush administration say the actions were warranted to avert a potential meltdown in the entire financial system, something that would have devastating consequences for the overall economy.

Bernanke said that 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 reductions to a key interest rate. Nevertheless, the chairman acknowledged uncertainty about the Fed's next steps, notwithstanding the mounting economic woes.

"Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year," Bernanke said.

The Fed Chief's remarks sunk stocks on Wall Street Wednesday. After Tuesday's nearly 400 point advance, the Dow dipped 45 points to 12,608. The S&P 500 lost 2 and a-half points to 1,367. And the Nasdaq composite was little changed, falling more than 1 point to 2,361.

The broader market was firm however, as advancers topped decliners by an 18 to 13 margin. Volume on the NYSE came to 4.1 billion shares. The Nadsaq stock market saw volume of 2 billion shares.

Crude oil futures rose $3.85 to settle at $104.83 a barrel on the New York Mercantile Exchange.