Bernanke rejects nationalizing banks

Federal Reserve Chairman Ben Bernanke appears on a television screen on the trading floor of the New York Stock Exchange Tuesday, Feb. 24, 2009. (AP Photo/Richard Drew)

by Frank James

While leaving open the chance the economy could start growing again next year if the proper policy actions are taken, Federal Reserve Chairman Ben Bernanke also said there was substantial downside risk, especially due to the global scope of the recession and the self-reinforcing nature of the downward spiral.

Meanwhile, in his testimony to the Senate Banking Committee, Bernanke eschewed the notion of nationalizing banks, saying it was possible to effectively recapitalize banks and direct their actions without taking them over.

Bernanke also provided more information on the type of analysis federal officials plan to perform on the nation's largest banks starting this week as regulators try to make sure those banks have enough money to continue their lending. "We don't need majority ownership to work with the banks," Bernanke said.

"We have very strong supervisory oversight," he said. "We can work with them now to get them to do whatever's necessary to restructure. I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize the banks. It just isn't necessary."

Bernanke's comments were among the strongest from a senior federal policymaker to the question of whether federal officials envision nationalizing the U.S.' largest banks. Uncertainty over the federal government's plans has driven down the share prices of bank-holding companies and roiled financial markets.

Concerning the expectations of Federal Reserve policymakers for the economy, Bernanke said they discerned light at the end of tunnel. "If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," Bernanke said.

"If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer and the better alignment of business inventories and final sales, as well as the increased availability of credit," he added.

Bernanke said Federal Reserve forecasters now expect unemployment to rise to between 8-1/2 percent to 8-3/4 percent in the 2009 fourth quarter with unemployment peaking in 2010 and falling to 8 percent to 8-1/4 percent. January's unemployment rate was 7.6 percent.

But the Federal Reserve chairman indicated he saw risks to that forecast. Because of the weakness of foreign economies, it's questionable whether the U.S. may not be able to export its way back to recovery. The worldwide effects could also continue to weigh on the financial markets, Bernanke said.

Asked about federal regulators' plans to examine the financial health of banks, Bernanke said the idea was not to give the nation's 19 largest banks passing or failing grades but to make sure they have access to enough capital, especially if economic conditions worsen.

"I should emphasize that the outcome of this test is not going to be, say, you pass, you fail," Bernanke said. "That's not the outcome. The outcome is going to be here's how much capital this institution needs to guarantee that it will have high-quality capital and to be well capitalized sufficient to be able to lend and support the economy even if the stress scenario arises. So the purpose of the test is to try to ensure that even in a bad scenario, banks will have enough capital, including enough common equity, to meet their obligations to lend."