Federal Reserve chairman Ben Bernanke said Tuesday that the fiscal stimulus package by President-elect Barak Obama would significantly boost for the stagnant U.S. economy, however he warned it may be enough to last for the long term unless other steps are taken to stabilize the shaky financial system.
Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system. More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets, Bernanke said in a speech to the London School of Economics, according to prepared remarks.
Bernanke indicated in his speech that further government aid to the US financial system as essential to an economic recovery. This is a first time the Fed chief has referenced the roughly $800 billion recovery plan being.
There are three approaches the Fed chairman recommends on troubled assets. One is the public purchases of the bad assets, under the original plan of US Treasury Secretary Henry Paulson's Troubled Asset Relief Program.
Another option is to which the government would agree to absorb, in exchange for warrants or some other form of compensation, part of the losses on specified portfolios of troubled assets. Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad banks, Bernanke said.