Bernanke Says Economy Still Has Long Road To Recovery

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Federal Reserve Chairman Ben Bernanke said Monday that while the economy appears to be recovering from last year's financial crisis, the economy still has "some way to go" before the country can be assured that the recovery is self-sustaining.

Speaking before the Economic Club in Washington, D.C., Bernanke lauded the Fed for taking action to keep the U.S. and the world from plunging into a greater economic meltdown and highlighted positive signs of an economic recovery.

The chairman highlighted a rebound in demand for homes and the shrinking inventory of new, unsold homes, and added that the economy should see modest growth that will lower the nation's unemployment rate.

He warned, however, that the labor market will remain weak and the unemployment rate will decline at a slower rate than would be ideal.

Bernanke added that slack in the labor markets and the tight credit market will keep household spending low and keep the economic recovery moving at a moderate pace.

He also said that inflation should remain low and move even lower despite the expansion of the central bank's balance sheet due to its accommodative policy.

The chairman added during the question and answer session that he expected interest rates to remain low for an extended period.

"Right now we are still looking at the extended period, given that conditions remain, low rate utilization ... and stable inflation expectations, that remains where we are now," he said.

Addressing the size of the Fed's balance sheet, Bernanke went on to say that efforts taken by the Fed to support the economy were fully consistent with the traditional central banking mandate of ensuring price stability and maximum employment.

The chairman also touched on unwinding the central bank's massive balance sheet and said that the tools are in place to do so when the time comes, adding that the Fed would be able to sell assets to reduce its balance sheet and will continue to keep a close eye on inflation.

Speaking on regulatory reform, Bernanke stressed that all regulatory bodies must undertake self assessment to make changes in order to avoid and mitigate future financial crises, and he said that the Fed was examining its own approach to regulation.

As he has in many previous speeches, Bernanke said that a regulatory system must be put in place so that failing systemically important firms could be would down in an orderly way so that financial stability could be protected and losses could be imposed on shareholders and creditors with no additional cost to taxpayers.

"Regulators--the Federal Reserve included--must complete a thoroughgoing overhaul of their approach to supervision, and the Congress should move forward in making needed changes to our system of financial regulation to avoid a similar crisis in the future," he said. "In particular, we must solve the problem of 'too big to fail.'"

Bernanke also took time after his speech to answer questions from the audience, including former Fed governor Andrew Brimmer.

Brimmer asked the chairman why the decision was made to save AIG and Bear Stearns and not Lehman Brothers during the height of last year's financial crisis.

Bernanke said that both the Fed and the Treasury was concerned that the collapse of such firms would have "very adverse" effects on the economy, a concern that was confirmed by the collapse of Lehman.

"We did our best to…protect the system from the collapse of these firms, all of them," he said, adding that the only power the Fed had was the central bank's lending authority against capital, and that there was nothing it could do to save Lehman.

"If we're going to avoid this sort of crisis in the future, if we're going to avoid the very unpopular, and deservedly so, bailouts that were associated with it, we have to have a better structure, a better system," he said.

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