Fed Chief Says Obama Stimulus Could Revive Economy and Housing Markets

Federal Reserve Chairman Ben Bernanke said today that a giant stimulus package continues to be crafted by the team of President-elect Barack Obama that many believe will give the economy the boost it needs, but additional measures must be taken to reinforce the unstable financial system for any recovery to work.  In his news conference, the Fed Chief suggested the government infuse more funds into banking system. He offered options to deal with bad credit mortgages and other poor performing assets held by financial institutions, a problem that has contributed to stagnant mortgage lending.  Again, Bernanke requested government intervention to stem the foreclosure crisis in the wake of a crumbling housing market.

The Fed Chief mentioned that the $800 billion recovery plan, a combination of tax cuts and increased government spending is now being massaged by the Obama team and the Democrat-controlled Congress could provide a “significant boost” to the hobbling economy. But he made clear that such a plan must be part of a broader, multi-pronged government response to fight the worst financial and housing crisis the hit the U.S. and the global economy since the Great Depression in the 1930s.  “Fiscal policy can stimulate economic activity, but a sustained recovery will also require a comprehensive plan to stabilize the financial system and restore normal flows of credit,” Bernanke said. “History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively.”

To help on that front, the Federal Reserve has agreed to lend billions to finance companies and purchasing some of these companies’ debt to rebuild the credit markets. The US Treasury Department is overseeing a $700 financial bailout program that has pledged to inject $250 billion into banks in return for partial government ownership.   Bernanke said “more capital injections and guarantees may become necessary” to stabilize financial markets and spur more lending. If Obama’s incoming Treasury secretary Timothy Geithner decides to remove toxic assets from financial institutions’ balance sheets — the original but abandoned strategy under the $700 billion bailout — Bernanke suggested some options to do that.

Bernanke said he understands this concern, but added: “This disparate treatment, unappealing as it is, appears unavoidable.”  Washington policymakers, Bernanke said, “must therefore do what they can to communicate to their constituencies why financial stabilization is essential for economic recovery and is therefore in the broader public interest.”

The Federal Reserve Chief reminded us that more Obama led relief efforts were on the way to stop the home foreclosure mess could strengthen the real estate market if the lenders offer loan modification plans that struggling homeowners can afford.   To soften the landing from the recession, last month the Fed Chief cut key rates to an all-time low of between zero and 0.25%. The Federal Reserve renewed his commitment to keep mortgage rates at that level for some time and pledged to use unconventional tools to jump-start the ailing economy. The central bank led by the Fed Chief will reconvene later this month to assess economic and financial conditions.  Sign up today at Jason Cardiff Tips online for email newsletters, real estate articles and financing reports for free with no obligation.