US Fed Chief Says Growth Depends on Stabilizing Markets

As Congress debates President Bush's proposed bail out of the bad loans of financial institutions, central bank chief Ben Bernanke told lawmakers Wednesday that the U.S. economy risked "very serious consequences" if measures were not taken. VOA's Barry Wood has more.

Appearing before the Joint Economic Committee, Bernanke cautioned against reducing the size of the proposed $700 billion rescue plan constructed by the U.S. Treasury.

He said the package, which Congress may vote on by the end of the week, is needed to rescue an already weak U.S. economy.

He said $700 billion, while a very big number, represents only five percent of the value of all outstanding U.S. home mortgages, which total $14 trillion.

The proposed package would aim to sell off these mortgage-related debts in the future when, the Treasury says, their value might have risen.

But skeptical lawmakers from both sides said they wanted assurances that the plan would benefit ordinary American homeowners as well as Wall Street.

Bernanke said the bailout, if successful, would not boost inflation and that interest rates would not rise.

"If it does in fact strengthen the financial markets, increase credit extension, and help the economy grow, then the Fed would perhaps have to act sooner in raising rates, than otherwise perhaps," he said. "But that would be part of the normal part of recovery."

Bernanke was asked about the parallels between today's financial crisis and the earlier period of sustained economic decline in the Great Depression of the 1930s.

"When there are major dislocations in the financial sector, in the credit creation process, it can have significant effects on growth and employment in the economy," he said. "And that has been true not just in the United States but in a number of countries, both emerging market and industrial countries."

The Fed Chief pointed out that labor markets are weak and unemployment is high. And, he said, despite an easing of oil and gas prices, consumer spending is likely to be sluggish in the near term.

In addition, slower growth around the world is likely to blunt demand for U.S. exports, which had been helping buoy the economy.