FED Warning On More Tough Times Ahead

bernake-feds-chairmanFederal Reserve Chairman Ben S. Bernanke warned today in an interview that a fiscal stimulus package will be enough to generate an economic recovery. He also added that the government may need to buy or guarantee banks’ problematic assets to revive growth.

“Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke said in a speech held today at the London School of Economics. “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.”

Bernanke’s remarks indicate he may be seeking to influence discussions among lawmakers and President-elect Barack Obama’s economic aides on how to deploy the next $350 billion of the financial-rescue fund approved in October. While some Democrats have focused on offering aid to troubled homeowners, the Fed chief’s comments show he’s more concerned about a continued decrease of credit granted to companies and households.

Fed’s chief reccomended basically three approaches, which were namely:

– government should buy troubled assets (which as we saw in the previous investment blogs here on doitinvest.com was not the best measure, since money spent like this did not reach their final purpose, to relaunch the credit cycle);

– “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 bank”, as Bernake himself said, and

– that the government absorbs losses from a troubled portfolio in exchange for a fee or for shares.

It seems that all these measures cannot really help the US economy. With $350 billion already spent on AIG and Citibank from taxpayer’s funds, the US government has already exceeded any initial forecasts for its spending bill. And yet S&P’s 500 index has lost in the last 4 days more than 14%, whilst only Citibank lost yesterday 17% to $5,60 per share…

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