February 7, 2012  Print Email | Bernanke predicts US recovery next year
Revamping of banking system must continue
Posted by Agencies at 10:32 AM GMT on Mar 16, 2009 | WASHINGTON (REUTERS): Federal Reserve chairman Ben Bernanke believes that if attempts to rebuild the US' shattered banking system continue, the United States should start recovering from recession next year.
 Hopes that the worst might be over for US banking giants, combined with pledges from the G20 group of the world's top economies that they will do more and spend more to combat the worst downturn since the 1930s, lifted Asian stocks by one per cent to a one-month high.
"It seems as if overall worry about the US financial sector is fading," said Noritsugu Hirakawa, a strategist at Okasan Securities in Japan.
Citigroup, Bank of America and JP Morgan Chase all said last week they have returned to profit early this quarter and believed they should ride out the recession without more taxpayer help.
News that the American International Group was paying millions in staff bonuses and that a big part of government bailout cash got passed on to European banks and Wall Street investment firms was set to test the will of Americans to bankroll the financial rescue.
Tokyo stocks gained 1.8 per cent, moving away from a 26-year closing low plumbed last week with extra help from a report that the Bank of Japan may decide to buy banks' subordinated debt to bolster their capital.
The central bank may also decide at its policy meeting on Tuesday and Wednesday to boost its monthly government debt purchases, stepping up efforts to buttress its recession-hit economy with cheap cash, according to one newspaper report.
The Federal Reserve is expected to announce no new initiatives when it ends its meeting also on Wednesday, while reiterating its readiness to do whatever necessary to help kick-start the world's biggest economy.
Both central banks, like many of their peers in Britain and elsewhere, have slashed interest rates to near zero and turned to less conventional actions such as direct buying of a growing pool of assets.
YEAR OF RECOVERY
Bernanke, in an interview with CBS programme 60 Minutes, largely upheld the Fed's view that the recession that took hold in December 2007 would end this year and that 2010 would be a year of recovery. "We'll see the recession coming to an end probably this year," Bernanke said. "We'll see recovery beginning next year."
The Fed chairman said his greatest worry was that lawmakers and the public would withdraw support for efforts aimed at stabilising the banking system crippled by losses on toxic debt linked to the crumbling US housing market. "The biggest risk is that, you know, we don't have the political will," he said. "We don't have the commitment to solve this problem, and that we let it just continue. In which case, we can't count on recovery."
AIG, the struggling insurance giant, which received $173 billion in federal funds to survive, said it was paying $165 million in bonuses to employees in the very division that crippled the company by issuing billions of dollars in derivatives insuring risky assets.
It also disclosed that Goldman Sachs and several European banks were major beneficiaries of $93 billion in payments it had made to its partners.
Bernanke acknowledged the depth of public resentment against institutions such as the AIG, but argued the financial rescue was necessary to protect the US economy and jobs. "I care about Wall Street for one reason and one reason only, because what happens on Wall Street matters to Main Street."
The financial system remains fragile, despite a $700 billion bailout of the banking system approved by Congress in October, and US president Barack Obama has said more money will likely be needed to repair debt-laden banks.
Recent economic data has pointed to an intensifying economic downturn. The US unemployment rate rose to a 25-year high of 8.1 per cent in February as employers cut 651,000 jobs, taking the recession's job loss total to 4.4 million. Home and auto sales have slid in recent months and manufacturing has contracted.
In a sign of concern about the health of the world economy, the oil exporters' OPEC group on Sunday resisted calls for more output cuts and maintained its targets, sending oil prices down by $1.7 per barrel.
The US government has been criticised for its efforts to combat the crisis. In particular, its plan to stabilise banks drew fire for lacking details. Treasury secretary Timothy Geithner plans to detail his plan this week and president Barack Obama is set to announce steps today to make it easier for small business owners to borrow money.
Geithner is also due to propose an overhaul of the financial regulatory system that is expected to give the Federal Reserve powers to monitor broad economic risks to prevent a repeat of the current crisis.
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